JPMorgan expects IT stocks to decline further as fears of slowdown rise

"As growth expectations get corrected, especially on the earning side, there could be further downsides because even after the correction so far, as in a note this morning we highlighted, the overall sector remains between 40 percent and 45 percent above 10-15-year pre-COVID average levels," said Ankur Rudra, Head of India Telecom & IT Research, JPMorgan, in an interview with CNBC-TV18.

All major IT companies were trading lower by 1-2 percent on the BSE on Tuesday. While Infosys was trading 1.33 percent lower at Rs 1,510 per share, TCS was trading 1.80 percent lower at Rs 3,368 per share on the BSE around 1 PM. Wipro was trading 1.32 percent lower at Rs 467 per share while Tech Mahindra was down 1.09 percent at Rs 1,132.75 per share.

Rudra's comments came after JPMorgan analysts last month downgraded the sector to "underweight" citing soaring inflation, supply chain issues and the impact of the Ukraine-Russia war.

"We see peak revenue growth behind us and EBIT margins trending down from inflation, mean reversion," it had said.

“So we have turned our sector stance to bearish about a few weeks ago and our perspective is that we are clearly seeing a very potentially sharp growth slowdown, and particularly for the sector, what's making it worse is that this comes with the combination of several margin risks, particularly from wage cost inflation and a lot of costs...," said Rudra. According to him, there is a late cyclicality in the sector.

However, Dharmender Kapoor, CEO and MD, Birlasoft, believes there is no reduction in demand for IT services.

“If I look at Birlasoft as well as my peers, I don't see any challenge or headwind with respect to the demand that we have seen. I met quite a few clients, they are not stopping any of their programmes, and they are not giving us any guidance with respect to reducing the intake of people for them for the programmes that we signed up for," he said.