US recession & IT stocks: Here is what happened in 2008 and 2020

NEW DELHI: Although IT stocks have been massive wealth creators for investors in the last few decades, their performance so far in the calendar year has been nothing but disappointing. While the Nifty IT index has slumped over 28 per cent year-to-date, some of its constituents like Tech Mahindra, LTTS, LTI and Wipro have eroded more than 40 per cent of shareholder wealth.

Despite a healthy demand environment and robust business growth guidance, investors are losing sleep over fears of a recession in the US and Europe, rising interest rates, growing geopolitical risks and risks to margin assumptions amid high inflation and supply-side challenges.

An analysis of past recessions in 2008 (global financial crisis) and 2020 (pandemic) shows that stock prices override fundamentals as recession fears set in but surges later on as revenue catches up to the pre-recession trend a year or two into recovery.

Lesson from 2008 market crash
Domestic brokerage Emkay Global studied the performance of TWITCH - TCS, Wipro, Infosys, Tech Mahindra, Cognizant and HCL Tech - and found that during the 2008 crisis, their revenue weakness started a quarter earlier than the real economic slowdown as BFSI spending got impacted sharply.

“TWITCH revenue growth weakened in the September 2008 quarter, coinciding with the Lehman crisis that came to light in September 2008. The recovery in TWITCH revenue was swift once the US GDP started to show initial signs of recovery,” it said.


Lesson from 2020 crash
In tune with the sharp decline in GDP due to lockdowns, revenue of TWITCH was impacted in the later part of March 2020 and Q1FY21. However, after initial hiccups, IT demand increased substantially across industries, as CXOs realized the importance of tech spending to operate remotely, transforming their business models to stay relevant in business.


Recession and tech spending

Tech spends have exhibited a high correlation with US/global GDP in the past.

“Mild recession scenario may lead to loss of revenue growth for a year but trend growth is likely to be regained over next 2 years,” Emkay said adding that surprisingly, margins expand during recession but revert with recovery.

Margins for TWITCH companies were higher during the recession period as companies employed cost-saving initiatives and benefited from favorable currency movements.

During the recovery period, margins of TWITCH companies declined as discretionary costs came back and clients asked more for less, it said.

During 2008, the margins of TWITCH companies were stable and moderated in the recovery period. Similarly, during the pandemic, margins of TWITCH companies saw an expansion initially and a gradual moderation due to salary inflation and normalization of travel and other discretionary costs.


Besides, rupee depreciation will also cushion the impact of revenue loss for Indian IT majors. The US dollar typically strengthens in a recession, which has a positive effect on PAT for IT companies.

IT services stocks are expected to maintain their premium valuations compared with the pre-Covid period, considering multi-year digital and cloud growth opportunities, improved capital allocation, growing tech intensity across industries driving growth faster than global GDP growth, Emkay analyst Dipesh Mehta said.

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