The Indian stock markets have been going through times of heightened volatility since quite some time now and the benchmarks have corrected over 10 per cent since the start of this year and over 17 per cent from the record highs touched in October. The sharp fall in Thursday’s session came after world markets were rattled by the US Federal Reserve’s 75 basis points rate hike, the steepest hike since 1994, to control the inflation which has spiraled to new 40 year high in May. The sharp fall in markets have raised worries among market participants that India may enter the bear market territory.
Typically, a bear market begins when an index falls 20 per cent from its record high. With Indian benchmarks down by 17 per cent, many market watchers expect the country to enter a bearish phase.
Meanwhile, the benchmarks have corrected 17 per cent from record highs but the pain has been deeper in mid- and small-cap shares as the Nifty Midcap 100 index has dropped 19 per cent while the Nifty Smallcap 100 index has tumbled a whopping 28 per cent, data from the National Stock Exchange showed.
Stocks in the BSE 100 index which measures the performance of the 100 largest and most liquid Indian companies have seen a sharp correction and have massively underperformed the benchmark Nifty 50 index
Larsen & Toubro Infotech is the top loser in the BSE 100 basket of shares, the stock has plunged 43 per cent since the start of the year. Heavyweight shares like Tech Mahindra, Piramal Enterprises, Wipro, Lupin, Info Edge, Bajaj Finserv and Zee Entertainment have also seen their stock value erode in range of 30-40 per cent.
Three out of 5 top losers in the BSE 100 basket of shares are from the information technology space. The IT industry has been facing high attrition in the aftermath of Coviid-19 pandemic and in order to retain talent they have undertaken wage hikes which have led to increase in the employee cost of these companies.
Wipro’s employee cost for financial year ended March 2022 rose 19 per cent to Rs 31,542 crore from Rs 26,467 crore in the previous financial year. L&T Infotech’s employee cost has jumped 26 per cent to Rs 8,590 crore and Tech Mahindra’s employee cost advanced 21 per cent to Rs 11,054 crore from Rs 9,162 crore in the year ago period, data from Ace Equities showed.
Last month, couple of international brokerages downgraded companies in Indian information technology sector citing decelerating revenue growth and risks to operating profit margins.
JP Morgan downgraded the IT sector to “Underweight” due to concerns over growth and margins.
High levels of revenue growth may come under question due to the anticipated slowdown in the US economy amidst a spike in interest rates. In addition, inflation may take longer to taper so the high EBIT margins may also be tough to sustain. In fact, JP Morgan is targeting 10-20 per cent downsides in valuations for leading IT companies like TCS, Wipro and HCL Tech. However, JPM remains positive on Infosys in the IT pack.
Meanwhile, Japan-based Nomoura in a report said, "Fast changing macroeconomic conditions, hawkish Fed stance to tame inflation through continued interest rates hikes and profit warnings by corporates across the globe seem to suggest tough days are ahead for tech spending."
These stocks have witnessed sharp correction because they are going through a phase of multiple de-rating owing to high inflation, rising bond yields and rising interest rates, explained Ashish Chaturmohta, director and head of equity advisory research at JM Financials.
“There are two headwinds for these companies rising interest rates and inflation and both will reduce price-to-earnings (PE) multiples for these companies. They have seen correction but if you look back they have not come back to average PE multiples and there is consensus in markets that they will test the mean PE multiples,” Chaturmohta said.
Chaturmohta advises investors to not enter this space all at once he rather advises investors to start doing systematic investment planning (SIP) in these shares at current levels.
“Once Nifty comes around 14,500, which is a very high possibility, then one can get good opportunity of 1,000-1,200 points in Nifty to create a good portfolio by doing regular SIP in these names and this strategy should be followed rather than going all in at current juncture,” he added.
