From providing a 40 per cent return to investors in 2021-22 (Apr-Mar), Nifty IT index has tumbled 16 per cent so far in the current financial year.
The so-called ‘Big 5’ of the sector –
, , , and – have seen declines in their stock prices ranging from 8 per cent to 18 per cent and the selling pressure in the sector shows few signs of abating.
Key factors that have presented headwinds for the much-storied sector are slowing global economic growth and heavy cost pressures arising from the hiring side; the combination of which has eroded bottom lines for IT firms.
Analysts believe, however, that what could provide some much-needed support to the sector is the very phenomenon that has roiled equity markets across the globe – rate hikes by the US Federal Reserve.
The aggressive monetary tightening plan that the Fed has embarked on has led to the US dollar strengthening to near 20-year highs and in turn taken a toll on emerging market currencies such as the rupee.
While the exchange rate linkages are not as strong as they were earlier, large IT companies which earn a bulk of their revenues in US dollars, stand to reap some benefits from the rupee’s trajectory of depreciation, analysts said.
“It is important to see the rupee depreciation against the dollar. The rupee depreciation at the rate of 4% in a year is not a one-time or linear phenomenon; even
expected the rupee to touch the 77-mark in a short term, which is already breached,” Amit Khosla, Founder, Valtrust Capital told ETMarkets.com.
“The beginning of the rate cycle in the US is only going to put this process on a fast-track mode. This all is only seen to be helping IT companies by bringing some cushion to margin pressures,” he said.
So far in the current calendar, the rupee has depreciated close to 4 per cent against the US dollar, hitting an all-time low of 77.5250/$1 on Monday.
According to Khosla, in an environment like the current one – characterised by a massive bout of risk aversion – equity investors should strive to ensure that the companies that they are investing in have free cash flows, pricing power and zero debt.
“It is here that IT looks very promising…it is reported that IT companies in India have huge cash flows and are announcing dividends and buybacks,” he said.
Several analysts have voiced concerns over the trajectory of ‘growth’ stocks or those whose valuations factor in cash flows that are well into the future.
With surging government bond yields presenting a risk of equity valuation, market experts warn against investing in highly leveraged companies and those with large distant cash flows.
“In a scenario where there are supply chain bottlenecks, inflation widening the cost of funds, and commodities and raw material prices are breaking all records, manufacturing carries a higher risk for some time to come,” Khosla said.
“The way the yield curve is getting structured, even having financial companies in the portfolio seems risky.”
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)