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Foreign portfolio investors (FPIs) have pulled out over ₹37,000 crore from the IT services sector, making it the highest loser of foreign equity funds in the current fiscal.
According to depositories data, FPIs pulled out ₹37,328 crore from the ‘Software & Services’ sector between April 2021 and January 2022. It was even higher than the ₹35,187 crore of outflow from the banking sector, which has been witnessing intense sell-off over the last few months.
“Banking and IT are the two highest weightage sectors that are witnessing sell-off. We feel the recent selling in the IT pack is largely in response to the correction in the global IT majors. Besides, the concerns over maintaining operating margins and high attrition rate are also weighing on the sentiment,” said Ajit Mishra, V-P Research, Religare Broking.
Profit booking
Market experts say the sell-off was purely on account of ‘profit booking’, since the sector has been the biggest gainer during the pandemic due to rapid pace of digital adoption across industries. A few others say the exit was due to the unsustainable price to earnings ratios of sectoral stocks.
“IT sector got re-rated in 2020-21 as WFH opportunity, lower operating costs and improving growth outlook pushed up PE multiples of the sector significantly. However, the current pull-out seems based on a global shift towards cyclicals from defensives such as IT services, peaked out margins in near term and likely impact on IT sector valuations due to global funds flow consequent to interest rate tightening by global central banks in the current year,” said Amnish Aggarwal, Director, Institutional Research at Prabhudas Lilladher.
In FY21, FPIs made a net investment of ₹3,028 crore in the IT sector after pulling out ₹21,238 crore in FY20.
“The IT sector has been the best performer during the pandemic given stable earnings and advantages from digitalisation. The sustenance of this outperformer is being challenged today due to overheating leading to high valuations and slowdown in technology sector,” said Vinod Nair, Head of Research at Geojit Financial Services.
The IT sector continues to hold the second highest share of FPI assets, accounting for over 15 per cent of their total assets under custody (AUC) of ₹48.57-lakh crore as of December 2021. The Banking and Financial services sector has the highest share, accounting close to 30 per cent of total FPI assets.
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