NEW DELHI: If there's a recession in the US economy, can Indian IT services continue to bloom? That’s the question haunting investors in IT stocks ever since the US media started talking about the possibility of a recession. Even when the US Fed Chair Jerome Powell tried to soothe nerves by saying that “we’re not trying to induce a recession now”, the market wasn’t convinced enough.

Three bluechip IT stocks, bellwether Infosys NSE -0.52 %, Wipro NSE -3.94 % and Tech Mahindra NSE -1.23 %, hit their respective 52-week lows, a day after Powell went for the biggest rate hike since 1994. What was also concerning is the weakening outlook for economic growth in 2022, down to 1.7 per cent from 2.8 per cent earlier in March. 

Nifty IT index also slipped to a 52-week low of 27,067.45 on Thursday. It has already lost one-third of its value year-to-date. Infosys is down 26 per cent YTD, Tech Mahindra 45 per cent, Wipro 40 per cent and TCS NSE -2.40 per cent.

“A sharp downgrade of growth estimates by the US Fed cannot be bullish for Indian technology companies. Demand has to moderate. Be careful buying the sector just because the stocks are near 52-week lows,” independent market expert Sandip Sabharwal said.

In FY20-21, Infosys earned more than 97 per cent of its revenues from exports. More than 67 per cent of its revenue came in US dollars, hinting at the dominant role which the US market plays in its balance sheet. The picture is no different for most other IT majors.

Even though the current demand environment remains extremely strong, Kotak Institutional Equities said profit warning from clients of IT companies and increasing external risks makes the assumption of 6-8 per cent global IT spending growth, unreasonable. "We moderate our stance and bake in normalised global IT spending growth of 3-4 per cent for CY2023E and 7 per cent for CY2022E. We cut our FY2023-FY2025E revenue estimates by 2-10 per cent for our coverage universe," it said in a note to client ..

Global brokerage Nomura has also warned about the possibility of a potential slowdown in IT services demand in FY24.

Notwithstanding the recent depreciation of the rupee against the dollar, it said headwinds (~350bp) are expected to be higher than the tailwinds (~270bp) for the sector in FY23. Stating that it continues to prefer largecaps over midcaps, Nomura has downgraded TCS and LTI (from neutral to positive), Wipro, HCL and Persistent (from buy to neutral) based on valuations. It is bullish only on Infosys and Tech Mahindra.

PMS fund manager Saurabh Mukherjea, who owns LTTS in his portfolio, said from a structural standpoint India is likely to be a big gainer due to the cost optimisation drive across the globe in a rising inflation or a slowing global growth scenario. “While engineering services is a relatively younger industry, data from the Indian IT sector shows that slower growth in US/Europe has a limited impact on outsourcing,” he said in a note to investors.