Two factors that may cheer up IT stocks soon

The sector has been in the limelight for various reasons. An uptrend was witnessed with elevated demand due to the pandemic. The stock prices skyrocketed leading to exorbitant valuations. However, the rally slowed down with increasing attrition rates. The Nifty IT index has declined by 22% since April 1, 2022.

Attrition rates in the industry hit high levels as demand for skilled professionals was soaring. Companies doled out high appraisals and bonuses to retain talent thereby impacting their profit margins. Despite this employees switched and got better job offers. Some even migrated to foreign locations and start-ups.

However, the tide is finally turning in favour of IT companies now. US Tech companies have frozen hiring and laying off employees due to recession fears.

Almost 22,000 employees in the IT sector have been laid off in 2022 so far. Nearly 12,000 Indian start-up employees were affected due to layoffs. Ola, Blinkit, BYJU’s, and Mobile Premier League (MPL) are amongst the prominent ones to reduce their workforce.

These are all early signs of attrition peaking out. Attrition levels will normalise as appraisals are processed. Profit margins could stabilise with employee costs under control.

Another positive for the sector is the weakening of rupee against US Dollar which is beneficial for exporters.

Nifty IT Index valuations are also at reasonable levels. The price-to-earnings ratio of the Nifty IT index is now trading at 25.44 times. It’s down almost 40% from its recent high of 40x.

Agencies

The only major concern at this point in time is the recession fears in US. Nonetheless, it seems that markets have already priced that in.

With solid fundamentals and reasonable valuation IT sector is turning favourable. Investors must take a cue and start investing in a staggered form.

Technical Outlook

Nifty 50 index closed on a strong note for the week posting the highest gain in last 75 weeks. Similarly, Bank Nifty index also closed with terrific gains. Both the benchmark indices are trading at crucial zones now. Nifty is trading around the previous resistance zone and Bank Nifty is trading just near the falling channel resistance. Major global indices are also trading around falling resistance lines. So a mild decline cannot be ruled out. However, the short-term trend is still positive, and looking at the other market indicators such as breadth and sentiment, we believe the Nifty is heading for a move up to 17,400. Immediate support and resistance are now placed at 16,350 and 16,830 levels. A break below 16,150 will negate the bullish view.

Agencies

Expectations for the week
The upcoming week is set to be jam-packed with events. The FOMC meeting and press conference will be the centre of attention. While the rate hike is expected to be aggressive, market players will try to read between the lines to determine the direction of the economy. Fed would try to control the fast-rising inflation and not hurt the job market. Furthermore, the market mood will be impacted by the release of the United States’ QoQ GDP figures too. Back home you can expect some volatility as we are headed for monthly expiry. Nifty 50 closed the week at 16,719, up by 4.18%.

(Disclaimer: Recommendations, suggestions, views, and opinions given by the experts are their own. These do not represent the views of Economic Times)