Wednesday, August 17, 2022
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IT stocks broken due to high valuations and fear of falling demand, experts – the outlook of the sector is strong in the long term

Experts say that the high valuation of the Indian eye sector, fears of a decrease in demand due to supply pressure have increased the pressure on IT stocks.

IT Sector Outlook: Heavy selling has been seen in IT stocks in today’s trading. The results of Infosys and TCS have come at the domestic level. However, the results were slightly weaker than expected. At the same time, this week many big American companies are going to release their results. Before this, investors are selling. Today Infosys has seen a decline of 9 percent, TECHM 5 percent, WIPRO and TCS 3.5 percent and HCLTECH 23 percent. Nifty IT has been an underperformer in comparison to Nifty today. Experts say that the high valuation of the Indian eye sector, fears of a decrease in demand due to supply pressure have increased the pressure on IT stocks. However, the outlook for the sector is strong in the long term.

Fear of a drop in demand

Swastika Investmart Ltd. According to Santosh Meena, Head of Research, Nifty IT has been an underperformer as there is pressure from the supply side, there is a possibility of reduction in demand due to macro headwinds in western countries. At the same time, high valuation is also the reason behind this. The Indian IT sector is trading at 28 multiples of 1-year forward P/E as against 18 times 10-year P/E. A common theme in the results of both TCS and Infosys was that the highest level of attrition remained. At the same time, competition is increasing and companies are losing their pricing power. Salary hike, gradual return to office will increase expenses and put pressure on EBIT margin. However, the deal pipeline remains strong.

Hoping for good performance in the long term

There is a general perception among IT companies that customers are willing to pay for digitization regardless of their financial status and the state of the industry. But this thinking may change due to inflation and weak global economic cues. These factors will affect the ability of the client to make payments. In this way the expenditure on digitization will be reduced. Another thing to note is that as global interest rates are rising, money is moving from growth stocks to value stocks. Santosh Meena says that the IT sector may underperform in the short to mid-term but in the long term the importance of digitalisation, the ability to use IT and the growing importance of cloud migration cannot be taken away. Indian IT companies will do well in the long run.

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