The Hindu Business Line : Sub-prime woes continue to affect IT stocks

With a lot of uncertainty surrounding the allocation of IT budgets by global firms, particularly in the US, Indian IT stocks are feeling the heat. Even the rupee is not showing signs of slowing down, further dampening sentiment on Dalal Street.

“There have been further write-offs by big banks in the past couple of weeks because of the sub-prime issue and experts worldwide are of the view that this problem is not going to subside easily; in fact, with the Christmas season getting over, we are going to see a resurfacing of the sub-prime problems,” said an analyst with a Mumbai-based brokerage house.

IT bellwether Infosys was down by 5.78 per cent, Satyam dipped 4.03 per cent, Wipro fell by 2.05 per cent and TCS was down by 0.63 per cent.

“IT stocks have gone out of favour as there is uncertainty on the IT budget allocation front,” said Mr Harit Shah, IT analyst, Angel Broking Ltd.

IT spending

With large organisations and institutions abroad cutting costs due to recession, the spending pattern in future could definitely be a cause of concern for the IT sector, according to analysts.

“There is slowdown in IT spending because of recession in the US, as large institutes will be affected by sub-prime and there is uncertainty as to how well or not these companies can pass on the differential of the strengthening of the rupee,” said Ms Shahina Mukadam, Head-Research, IDBI Capital Market Services Ltd. With the US economy reeling under recession, Indian companies are going to get hit as the US is their biggest market, believe analysts.

“One main reason is the dollar depreciation, which keeps IT stocks as under-performers, as American companies, especially banks, are using Indian software and offshoring their activities to India. Because of this export dependency and with the US economy facing recession, it is affecting the IT sector in India substantially,” said Mr Vishwas Agarwal, an independent analyst.

Though major IT companies came out with good results, that was still below street expectations, said analysts.

Tax incentives

The only positive thing for the IT companies was tax incentives, which is given in the form of STPI benefits, but that too is proposed to be cancelled shortly.

“The FY-10 earnings to slow down as STPI scheme will come to an end, which might hit the IT companies badly,” said Mr Harit Shah.