Economic meltdown fears impact IT stocks

Our Bureau Mumbai/Bangalore | Updated on August 21, 2011


Too early to make an actual implication of S&P downgrade: Wipro

Fears of a repeat of the 2008 economic meltdown continue to impact the shares of software companies on the bourses.

On Friday, the BSE IT index shed 218.5 points to end the day at 4,956.62, 4.4 per cent lower than the previous day's close.

Shares of Infosys Technologies lost the most on the bourses as they were down by 5.79 per cent to close at Rs 2,225.4 on the BSE. During the day, Infosys fell as much as 7.8 per cent to register its biggest intraday drop since April 15.

Shares of TCS, Wipro and Tech Mahindra were down by 3.36 per cent, 2.29 per cent and 3.96 per cent respectively.

“Everybody is having the fear that 2008 will repeat itself. But people have to realise that in 2008, globally banks went bankrupt. Right now, the government debt is rising, but corporate profits are insulated from government debt,” said Ms Srishti Anand, IT Analyst with Angel Broking.

Growth uncertainty

These fears were compounded after rating agency Standard & Poor's recent downgrade of the US government's ‘AAA' sovereign credit rating — a development which raises concerns that investors will lose confidence in that country's economy.

Some analysts feel the downgrade could impact the US financial system and hence cause tightening of IT spending by the BFSI sector, which brings in over 40 per cent of the Indian IT sector's revenues.

“There are concerns on European and US economies. There is uncertainty on growth. But if there are no further untoward incidents in the US or Europe, that is, if there is no recession in the US and no banks go down in Europe, then the de-rating will reverse. It is hard to say when this will happen,” said Mr Dipen Shah, Senior Vice-President (Private Client Group Research), Kotak Securities.

In fact, in the last two weeks since the downgrade, the BSE IT index has come down by 17.7 per cent from 5,579.34 on August 5.

However, IT companies say it is business as usual — at least for the time being. “Our customers are not painting a negative picture. Demand still looks good,” said Mr Krishnakumar Natarajan, Chief Executive Officer and Managing Director, MindTree.

Mr T.K. Kurien, Chief Executive Officer of Wipro's IT business, is of the view that it is a tad too early to make an assessment on the actual implication of the S&P downgrade of the US. Even if the downgrade were to have a negative impact, he feels that the India's software sector is better prepared for macroeconomic changes today than it was in 2008.

Published on August 19, 2011

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