Foreign investors are rapidly exiting IT stocks. Since the beginning of FY20, Foreign Portfolio Investors (FPIs) have sold equities worth ₹3,800 crore in the ‘Software & Services’ sector. This, in just two-and-a-half months, is more than a third of what they sold in the whole of FY19 (₹10,113 crore).

Per sector-wise FPI investment data, Software & Services witnessed the highest sell-off in the equity segment in May 2019, with net sales worth ₹3,226 crore.

“Cognizant cutting down its revenue guidance, the strong rupee, localisation and increased costs of subcontractors led to profit-taking across IT stocks in May 2019,” said Deepak Jasani, Head, Retail Research, HDFC Securities. “FPIs participated more in the profit-booking than mutual funds or non-institutional players,” he added.

Last month, Cognizant cut its 2019 revenue guidance from 7-9 per cent to 3.6-5.1 per cent due to slower growth in the financial services and healthcare sectors. Infosys also lowered its growth guidance to 7.7-9.5 per cent for FY20 besides slashing its margin expectations.

“A talent shortage in the IT sector led to sub-contract hiring, which, in turn, has put pressure on margins,” said Milan Desai, Analyst, IIFL Securities Ltd.

Desai added that tougher US work-visa provisions, cautious commentary on the US banking sector and higher valuations of IT stocks are some of the other factors that could have weighed down FPI sentiment.

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Local players wade in

Despite a huge FPI sell-off in the sector, the S&P BSE IT index rose more than 29 per cent in FY19. Mutual Fund holdings in these stocks during the period also grew 49 per cent, signifying the increasing confidence of local players in the sector.

“Better re-rating due to growth and guidance, rupee depreciation against the dollar till October 2018, and IT companies announcing buyback plans for more than ₹23,000 crore in FY19 are some reasons for the IT index is doing well,” Jasani said.

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