As we have all noticed, there is a gradual decline in IT stocks in the last few months. As IT stocks are falling and a huge number of investors that have put their money in it is getting worried. In the last few months, Nifty IT is down by more than 10% which was a 4000 Point Fall.
Fall in Profit Margin:
Infosys, Financial highlights of the quarter ended March 31, 2022,
So what is the real reason behind this fall? Let’s explore:
|Particulars||March 31, 2022||March 31, 2021||Growth % Q4 22 over Q4 21||December 31, 2021||Growth % Q4 22 over Q3 22|
|Operating Margin %||21.5||24.5||(3.0)||23.5||(2.0)|
|Net Profit (after minority interest)||5,686||5,076||12.0||5,809||(2.1)|
|Basic EPS (₹)||13.56||11.96||13.4||13.86||(2.1)|
Reference link: https://www.infosys.com/about/last-quarter.html
Recently, IT giants, Infosys and TCS have released FY22 Q4 results. There is healthy growth in the revenue of TCS and Infosys, as they have made more money and sold more products. However, the profit margins for both companies were low. Investors are not happy with margin growth. As a result, the market participants are expecting the same trends in other IT sectors too.
There is an increase in the attrition rate of IT companies. The attrition rate is defined as the rate at which people are leaving a company. This is becoming really popular in the IT sectors over the last few years. One of the main reasons for this is most companies are becoming digitised. Plus, web3 and crypto projects are also booming in India. So people now have vast options to choose from instead of conventional IT jobs.
The attrition rate of TCS this year is 17.4 % which was only 7.2% last year.
IT Share Valuation
There is a huge fall in the valuation of IT shares. Due to the high expectations of people from the IT stocks, the valuation of these stocks are trading at 30x – 35x P/E. Whereas, there are various potential companies, which are new to the IT sector, have stock valuations of 18x – 20x P/E. In the last 10 years, IT sectors used to trade on 18x 1 year forward P/E. However, now it is trading at 24x 1 year forward PE. As a result, lots of traders feel that this value is quite expensive.
Increased Interest Rate
Macroeconomic and geopolitical factors can also be one of the biggest reasons for this downfall. Due to the rising inflation, across the world, the central banks are increasing interest rates. The rise in interest can directly affect several economies, impacting the business performance of several IT companies.
Plus, Indian IT sectors hold a major market in the US. With the increase in interest rates in the US, the Indian IT sectors have started facing problems.
The rupee-dollar exchange rate is also an important factor for the IT stock. Investors should remember that depreciating rupees against USD is good for the margin as dollar earning is more for in terms of the rupees.
However, IT companies still have strong order books and growth, especially in high-margin digital segments. According to market experts, once the market is stabilised there will be rapid growth in IT stocks.