India Tech Stocks’ $11 Billion Rally May Halt on Earnings Misses
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Earnings misses by leading Indian technology services companies are raising concern that the sector will struggle to justify an $11 billion rally since the US presidential election.
Valuations for the industries’ stocks soared to as high as a record 34 times one-year forward earnings from about 27 times after Donald Trump’s US presidential win spurred bets the companies would benefit from his pro-growth policies. Third-quarter earnings reports triggered a rethink, said Manish Jain, head of fund management at Centrum Capital Ltd.
With a measure of technology stocks on course for a weekly decline of about 3%, the sub-gauge hasn’t outperformed the benchmark Nifty 50 index since industry stalwart Tata Consultancy Services Ltd. kicked off the earnings season on Jan. 9. Infosys Ltd. is the only firm so far to post profit that beat the average analyst estimate, but its sales forecast fell short of consensus.
“The whole rally in the sector was built on hope and valuation comfort, and it looks like both factors are tapering off a bit,” said Mumbai-based Jain, who has recommended clients avoid the stocks. “Slow growth coupled with high valuations is a bit concerning,” he said.
Investors had been banking on India’s IT companies, which get most of their sales in the US, to benefit from Trump’s business-friendly policies. Still, the recent earnings shortfalls have undermined optimism just days before the president-elect takes office, said Dhananjay Sinha, co-head of equities at Systematix Group.
The cooling rally in technology stocks underscores risks to investors in India’s equity market, with the sector accounting for more than 14% of the Nifty 50. HSBC Holdings Plc. last week downgraded Indian shares to neutral, and consensus estimates for earnings growth from Nifty 50 companies declined to 5% from earlier projections of 15%.
Forward looking indicators for the sector such as deal wins and employee additions remain weak “for almost every company in the sector”, Citigroup Inc. analysts wrote in a note. The analysts retained a “cautious” view on the tech services sector in India due to margin pressure and a slower recovery in growth during coming quarters.
To be sure, technology stocks remain among preferred picks by funds and strategists, according to an informal Bloomberg survey, with expectations that lower interest rates and Trump’s policies will buoy US clients’ spending in 2025.
“We remain positive on domestic IT as a space among a weakening rupee, the US doing well and Trump policy formation,” said Ankita Pathak, chief global strategist at Angel One Wealth Ltd. But, she cautioned, some stocks with narrowing margins and stretched valuations may not be the greatest beneficiaries in the index.
