Rushing to stock up IT shares amid falling rupee? Here’s why it may not be a good contra bet in this market

New Delhi: Despite a sharp fall in rupee, IT stocks, which usually gain during the depreciation of domestic currency, have been hit hard. Even the flop show from the majority of the software exporters have dented the sentiments further.

With a free fall in the Indian currency, the domestic unit is kissing the 80-mark against the dollar and IT firms are expected to benefitted from this fall as majority of their revenue is earned in dollar terms.

However, in the first week of July 2022, a number of IT companies announced their earnings and missed the street estimates. This led to a steep fall in the Nifty IT index which is hovering around its 52-week lows.

The Nifty IT index has wiped off about one third of its value in the last six months, whereas the index has tanked close to 22 per cent in the last three months only.

"Sentiments for IT stocks are negative because of the sharp correction in the Nasdaq and looming fears of inflation in the United States," Kranthi Bathini, Director - Equity Strategy, WealthMills Securities, told ETMarkets.

Amid recession fears, IT spends and budgets of companies took a huge blow, which is denting future earning sentiments for tech companies.

On the other hand, the US dollar is not strengthening only against the Indian Rupee. The greenback has firmed up across all the major currencies and other currencies from the emerging market.

"The cost for IT companies has increased due to higher attrition rate, inflated compensation and increased travelling cost which have hurt the operational performance and margins of the IT sector, neutralising the windfall gains of weak rupee," Bathini added.

Smaller IT companies including Brightcom Group, Xelpmoc Design, 3i Infotech, Subex, Zensar Technologies, Tanla Platforms, Take Solutions have plunged between 50-70 per cent in the year 2022 so far.

Even popular names including Larsen & Toubro Infotech, Tech Mahindra, Wipro, L&T Technology Services, Birlasoft, Coforge, Mindtree, Sasken Technologies, Ramco Systems, Newgen Software Technologies have plunged up to 45 per cent.

Market experts, however, believe that IT remains a strong defensive bet in tough times. IT stocks have created solid wealth in the last few years and one should not write them off on the basis of one or two bad quarters, they advise.

Bathini from WealthMills suggested that investors with a decent risk appetite should look at midcap IT counters, whereas conservative investors should use the dips to accumulate bluechips like Tata Consultancy Services and Infosys.

Tata Consultancy announced its earnings on July 8 for the June 2022 quarter, whereas Infosys is yet to disclose its earnings for the period.

However, independent market expert Sandip Sabharwal said that one should not buy IT stocks right now as he sees another 10-15 per cent fall in the stock. He is waiting for management to turn bearish to take a contra call on the sector.

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