The IT stocks are falling like nine-pins. HCL Tech has seen the biggest intra-day slide, plunging nearly 9%. LTI Mindtree is also down over 3% intra-day and the Nifty IT Index is down over 2%. Interestingly, in a market that is broadly flat, the IT stocks are dragging and the IT Indices across BSE and NSE are the only ones that are down significantly.
In fact the Nifty IT Index is down over 4% on a 1-month timeframe. However, on a 6-month period the Index is up around 16%. Most analysts believe that the correction today is more of a rub-off impact of the disappointing HCt Tech guidance and the investors are now keenly awaiting the Infosys guidance which is expected to be positive.
Here are 3 reasons why IT stocks are falling HCL Tech margin worries
One of the biggest concens for the investors is the margin guidance by HCL Tech. Most brokerages have raised concerns about the Q4 guidance. According to Motilal Oswal, “the implied organic growth rate for IT&BS in Q4 is approximately 0.6% in constant currency terms at the upper end of the guidance. The management attributed this to a planned ramp-down in the Verizon deal and some project completions. However, in an environment where short-cycle deals are gaining momentum, the slower ramp-up of discretionary deals in Q4 is a dampener.”
Valuation-wise too they believe that the “hurdle rate for HCL Tech to now re-rate is higher than its peers.”
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The HCL Tech guidance, no doubt has been a sentiment dampener and has led to rub-off effect across the technology space.
Siddhartha Khemka, Head of Retail Research, Broking and Distribution at Motilal Oswal Financial Services pointed out that, “HCL Tech is the big worry in the tech sector now. The company is expecting lower growth in Q4 on planned rampdown in Verizon deal and few other contracts. The market is approaching IT stocks cautiously after the HCL Tech management’s weak Q4 guidance. We are seeing rub-off effect on other IT companies. However we do not expect that to last too long. Infosys is expected to come out with positive guidance on January 16.”
Pawan Parakh,
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