Despite the fact that technology service provider stocks have fallen less than those of global and local technology behemoths, analysts feel they are still vulnerable to further losses due to the prospect of further earnings downgrades. The stock prices of domestic IT services companies are down 16 to 35 percent from their 52-week highs. In the United States, the Nifty IT index and the Nasdaq 100 index have both fallen 23% from their 52-week highs. Almost half of the Nasdaq 100's technology stocks have lost between 30% and 75% of their value since their 52-week highs. The worst ratio since the 2008 financial crisis is about 15% of stocks have lost more than half of their value.
Paytm, Zomato, and Nykaa, which were all freshly listed new-age digital shares, have all dropped 40% to 71%. Some in the industry, however, argue that India's technical service providers should not be grouped in with global technology giants like Amazon and Facebook because of their different business and valuation systems. However, their close linkages to events in the United States prompt similarities. Many market participants are comparing the current sell-off in many US-based technology businesses to the dot-com bust of the early 2000s. According to a new Bank of America fund manager poll, all US tech companies are underweight for the first time since December 2008.
"The Nifty IT index is currently trading to the Nasdaq 100 Technology Sector index in the United States, demonstrating resilience in the domestic IT sector, driven by robust deal pipelines and continued momentum in digital transformations, as well as support from positive currency movements," said Sethumadhavan KS, an analyst at Geojit Financial Services. "We expect range-bound moves in the sector throughout the medium term." High values are a bigger worry about smaller domestic software exporters. In terms of price-to-earnings (PE), Tier-2 information technology businesses in India are currently trading at a 40% premium to blue chips, compared to a 14% discount on January 1, 2020. "We believe that vendor consolidation, a less diversified revenue mix that could lead to negative growth surprises, and a greater exposure to non-global 1000 clients whose profits are more vulnerable in the current macro environment will hurt Indian Tier-2 IT companies the most," said Girish Pai, head of research at Nirmal Bang Equities. Tata Consultancy Services, India's largest software exporter, has slumped 16 percent from its annual highs but is still trading at a PE of 33.40 times its five-year average of 27.91. The price-earnings ratio of Infosys is 29 times, compared to a five-year average of 22 times. Since its 52-week-high, the stock has lost 20% of its value. "PE multiples have peaked in this cycle, and while they have recently corrected, they are still at elevated levels, and as US interest rates rise and liquidity tightens, they will compress," Paid noted. Although technology service provider shares have declined less than those of global and local technology giants, analysts believe they are still vulnerable to further losses due to the possibility of further earnings downgrades.
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