Indian IT stocks experienced a significant drop of over 3% on Friday following Accenture's announcement of a reduced revenue forecast for fiscal 2024, which dampened the previously hopeful outlook for a demand recovery in the sector. This adjustment negatively impacted the Nifty IT index, which saw a decrease of 3.2%, with major players Infosys (INFY, Financial) and Tata Consultancy Services (TCS, Financial) witnessing declines of 3.5% and 2.7%, respectively.
Earlier in January, Infosys and TCS had reported quarterly results that exceeded expectations, igniting optimism for a resurgence in demand from clients in the banking, financial services, and insurance sectors, particularly in the critical U.S. market. This came after a period where clients were reducing budgets and either delaying or cancelling contracts.
However, Accenture's recent forecast adjustment from an initial 2% to 5% growth down to 1% to 3% has quelled hopes for a rapid sector rebound, as noted by Ashwin Mehta from Ambit Capital. The firm highlighted ongoing challenges such as a reduction in smaller deals, tighter client spending, and slower decision-making processes as factors contributing to a more cautious outlook.
Despite the Nifty IT index gaining 3.7% since the positive results from Infosys and TCS in mid-January, outperforming the Nifty 50 index's 1.7% increase, Accenture's cautionary stance has raised concerns regarding the valuations of IT stocks. According to Jefferies, the valuation of IT stocks, trading at 26 times their earnings—which is a 13% premium over their five-year average and a 29% premium to the Nifty 50—appears inflated given the deteriorating demand outlook for the sector, with no immediate recovery anticipated.
