For a second year in a row, the information technology sector bore the brunt of foreign investor sell-off in Indian equities. Foreign portfolio investors (FPIs) pulled out ₹51,138 crore of net investments from the technology sector, the highest among all sectors in the previous fiscal.

In FY22, the software services sector was the second biggest loser of FPI money with a net outflow of ₹49,660 crore. Market experts say the massive outflows from the IT sector are due to concerns over the global economic slowdown and likely cutback on IT spending by developed economies. 

According to Crisil Ratings, global macroeconomic and financial sector headwinds are set to take a deep toll on the domestic IT companies’ revenue growth in FY24. In a report, the ratings agency said the revenue growth of the ₹10-lakh crore sector is expected to decline to 10-12 per cent in FY24, from nearly 20 per cent in FY23.

Crisil’s senior director Anuj Sethi, said, “Headwinds in key markets, particularly the BFSI (banking, financial services and insurance) segment in the US and Europe, will affect the revenue growth of domestic IT services companies.”

The Indian IT stocks have had a dream run since the Covid-19 pandemic amid widespread digital adoption across industries. That, combined with the liquidity-driven bull run in FY21 pushed the valuation of several IT stocks to astronomical levels. 

However, the IT sector, as well as the larger equity market, saw corrections in the valuation over the last two years as FPIs pulled out large sums of money during this period. 

FPIs sold ₹37,632 crore from Indian equities in FY23 after pulling out ₹1.40-lakh crore in FY22. This is the first time FPIs sold consecutively for two financial years in Indian equities since 1993.

Top losers

FPIs pulled out ₹37,674 crore in net investments from the Oil & Gas sector and ₹29,921 crore from the banking & financial services sector. VK Vijayakumar, Chief Investment Strategist at Geojit Financial Services, said when FPIs turn sellers, they sell in segments where there is liquidity and in sectors where they are sitting on profits. “IT and financial services are two segments which meet both criteria,” he added. 

Recently, Kotak Institutional Equities said OPEC+ countries’ recent announcement to cutdown production and rising oil price is negative for downstream oil marketing companies (OMCs) as under-recoveries on petrol, diesel, and LPG may return if oil prices rise to over $90 per barrel.

Major gainers

Even as they were net sellers in the overall equity market, FPIs did buy in few sectors in FY23. The foreign investors made a net investment of ₹17,419 crore in the capital goods sector followed by FMCG (₹17,180 crore) and healthcare (₹16,145 crore).

Vijayakumar said there will always be contrarian themes which will outperform and FPIs will invest in such segments. “FMCG is always a safe defense in India. Capex revival augurs well for the capital goods segment in this capex cycle. Of late, healthcare has received a shot in the arm from the re-emergence of Covid in parts of the country,” he added.