Recession fears add to IT sector concerns

Fear of a recession in the US due to rising unemployment has added to the concerns of India’s IT services sector, which was seeing some growth returning after Q1FY25 results.

The Nifty IT closed 3.26 per cent down, as major IT services companies’ stock value fell.

Tata Consultancy Services (TCS), India’s largest IT services firm, saw its stock price fall 4 per cent during intraday trading.

It finally closed at Rs 4,155.1 per share, down 3 per cent from previous close.

Infosys’ share prices were down 5.6 per cent during intraday.

The stock closed at Rs 1,751.9 per share, down 3.84 per cent.

HCLTech closed 2.96 per cent below the previous close, and Wipro was down 3.4 per cent.

The larger concern, however, is if the fear of recession becomes a reality.

“Recent macro data in the US does create a scenario of near-term uncertainty.

"Enterprises could wait for the next set of data to come in to take their decisions and to evaluate how deep is the concern.

"Our global equity strategists think that there are data that is still far from recessionary.

"Also, they would avoid to focus on single data given this cycle is characterised by widely divergent data,” said Kumar Rakesh, analyst (IT & Auto), BNP Paribas.

However, analysts also believe that this may propel the rate-cut decision in the US.

“Recession is an obvious negative. However, this could accelerate the Fed’s rate cut, which could offset some of the impact on the IT sector,” added Rakesh.

Market sources and media reports concur that today’s global selloff may trigger an early rate cut by the US Fed.

“This incident will certainly accelerate the process.

"But I believe there will only be a slowdown and not a recession.

"Some of the data is pretty strong for the US economy,” said an analyst on the condition of anonymity.

Today’s selloff and the fear of recession have created a cloud of uncertainty for the IT services industry, which only recently said that green shoots of growth were visible.

“Q1FY25 marked a good beginning, with recovery in pockets of financial services, while demand deteriorated in the retail vertical.

"Telecom continues to be stressed, but cost takeout deals are abundant, while other verticals are steady.

"Meeting estimates for FY26 requires a broad-based discretionary spending recovery.

"This is our base case, and any slowdown in the US economy poses risks to these estimates,” said a report from Kotak Institutional Equities on Q1FY25 performance of the sector.