Foreign portfolio investors (FPIs) were in a sell-off mode with respect to Indian IT services sector in FY22. According to latest depositories data, the portfolio investors pulled out close to ₹50,000 crore from the software & services sector, making it the second biggest loser of foreign funds in the previous fiscal.

Banking and financial services sector was the highest loser of the record foreign fund outflow from the Indian market in FY22 with a net outflow of ₹82,398 crore.

Wage inflation

“The IT industry is seeing wage inflation for the first time in 15 years which has made investors a little apprehensive on the profit growth expectations. Besides, most IT stocks had seen a dream run during the Covid era given the shift towards digitisation,” Vinit Bolinjkar, Head of Research, Ventura Securities, said.

“The street feels that the industry will now take a breather before any new tailwind arises. Also, expectations of Fed hiking interest rates have increased fear among the investors especially for the IT sector,” he added.

The Indian equity market itself saw its highest ever outflow of foreign funds at ₹1.40-lakh crore due to rising interest rates in the global markets, withdrawal of economic stimulus by the US Fed Reserve, unsustainable valuations of the Indian stocks after a massive market rally in the last two years. The geopolitical tensions only exacerbated it further.

Selling trend

“Since October 2021, FPIs have been big sellers in financials, particularly banks and marginal sellers in IT. The reason why they are sellers in these segments is that they account for the major part of FPI’s Assets under Custody,” VK Vijayakumar, Chief Investment Strategist at Geojit Financial Services, said.

“FPIs consider Indian stocks to be over-valued particularly when equity markets globally will be under pressure from aggressive Fed tightening expected this year,” he added.

As of March 2022, FPI assets in software & services stood at ₹6.74-lakh crore, accounting slightly over 14 per cent of their entire equity assets in India. FPIs were buyers in the sector in FY21 with a net inflow of ₹3,028 crore after being net sellers to the tune of ₹21,238 crore in FY20.

Tech stocks

“Technology stocks have been at the receiving end of the market as valuations were stretched and as negative risks to global growth emerged. A reading of tech heavy Nasdaq reveals it without any doubt. Tech stocks in India, too, are seen selling by foreign funds,” said Nimish Shah, Chief Investment Officer – Listed Investments, Waterfield Advisors.

Ajit Mishra, VP- Research, Religare Broking, said the IT sector witnessed a rerating owing to a strong jump in demand for IT services during the pandemic. “However, the peaking of Covid cases, coupled with the US Fed’s hawkish stance on interest rates, could have prompted the FIIs to book profit in the IT space.”

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