India's IT Sector's Performance: A Long-Term Perspective vs. Short-Term Setbacks

The IT sector in India has taken a big hit as many people are selling shares belonging to Infosys and Tata Consultancy Services. This has caused the weightage of the IT sector in the Nifty50 to drop to its lowest level in five years, now standing at 12.2%, down from 17.7% at the end of March 2022.

At the end of March this year, the top IT companies like TCS, Infosys, Wipro, HCL Technologies, and Tech Mahindra accounted for about 13.6 percent of the index.

Following the recent decline, the IT sector has now become the third-largest component of the benchmark index, slightly ahead of the oil and gas sector. FMCG (fast-moving consumer goods) companies like Hindustan Unilever, ITC, Asian Paints, Nestle, and Britannia have taken the lead and together make up 12.6 weighting in the Nifty 50, which is an increase of 270 basis points since March 2022.

The IT sector has lost most of its gains in market capitalization since the post-pandemic period and is now not doing very well on the stock markets. However, in the long run, it has performed well. Since the end of December 2017, the top five IT companies have seen their combined market capitalization increase by 110 percent, compared to a 67.4 percent increase in the Nifty 50 index during the same period.

Unfortunately, the near-term outlook for IT companies doesn't look too good due to lower than expected revenue and earnings growth reported by Tata Consultancy Services and Infosys in Q4FY23. This has led many brokerages to cut their earnings and share price targets for FY24.

For instance, Infosys reported weak Q4FY23 revenue of $4.55 billion, which was down 3.2 percent Q-o-Q and significantly below the estimated 0.6 percent Q-o-Q growth. As a result, analysts at Motilal Oswal Financial Services have lowered their FY24/FY25 EPS estimates by 4 and 5 percent respectively to factor in the Q4FY23 miss and FY24 guidance.

Similarly, TCS's operating performance was slightly below estimates, and clients are taking longer to make decisions and slowing down discretionary IT projects, resulting in lower revenue growth in FY24, according to analysts at YES Securities after TCS's Q4FY23 results. Despite this, analysts believe the long-term demand story remains good due to cloud adoption and data analytics across enterprises.

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