The Indian stock market is experiencing turbulence once again, particularly within the technology sector. After a brief two-day rally, Indian tech stocks have resumed their downward trend, primarily influenced by global economic concerns. On March 19, the Nifty IT index fell by 2.2%, landing at 35,804 points. This decline follows a significant bear market phase, where the index has plummeted 20% from its peak, now reflecting a total correction of 22% since the highs of 2024.

Global Economic Concerns Impacting Indian Tech Stocks

The resurgence of worries regarding the U.S. economy has intensified, particularly with concerns about a potential recession stemming from trade disputes initiated during Donald Trump’s presidency. These trade tensions are dampening expectations for possible interest rate cuts from the U.S. Federal Reserve, further applying pressure on tech stocks.

• Nifty IT index has entered a bear market, down 20% from its peak.
• Current correction stands at 22% from previous highs.
• Concerns about U.S. recession are growing, affecting global markets.

Valuation Concerns Persist

Recent analysis from Citi highlights that despite the Nifty IT index’s significant drop, the valuations of these stocks remain elevated. The index is currently trading at a 30% premium to the Nifty 50, raising questions about its sustainability. Citi pointed out that while growth rates have dipped below pre-pandemic levels, the high valuations are still influenced by the rapid growth seen in the years 2021 and 2022.

• IT sector growth has slowed compared to pre-COVID levels.
• Valuations remain high despite a 20% index drop.
• The index’s premium to Nifty 50 is at 30%.

Challenges Ahead for IT Firms

The ongoing evolution of artificial intelligence and the slowdown in software development pose significant challenges for Indian IT companies. Citi notes that the free cash flow yield for leading Indian IT firms hovers around 3.5-4%, which they deem unattractive given the current market outlook. They anticipate only 4% revenue growth for these companies in fiscal 2026, mirroring estimates for the current fiscal year.

• Experts foresee a 4% revenue growth for IT stocks by FY2026.
• Citi has a "sell" rating on nine out of twelve tech stocks analyzed.
• Mphasis has been upgraded to "neutral" with a revised price target of ₹2,395 per share.

Broader Concerns from Other Brokerages

Morgan Stanley has also expressed caution regarding the Indian IT sector, identifying emerging risks that could hinder revenue growth and valuations. The brokerage emphasized the dual impact of lower GDP growth in the U.S. and the ongoing technological transition that poses headwinds for Indian IT firms.

• Morgan Stanley flags emerging risks to revenue and valuations.
• The combination of low GDP growth and tech transitions is challenging for Indian firms.

Additionally, domestic brokerage Motilal Oswal reports a shift in sentiment towards tech services, highlighting a "wait-and-watch" approach among clients, which is causing delays in spending on services despite ongoing capital expenditures. Meanwhile, ICRA forecasts moderate revenue growth of 4-6% in USD terms for Indian IT services companies, covering 60% of the industry’s revenue.

• Motilal Oswal notes a cautious sentiment in IT services.
• ICRA predicts a 4-6% revenue growth in FY2026 for major players.

The Indian technology sector is at a crossroads, faced with both external economic pressures and internal growth challenges. As the market navigates these turbulent times, stakeholders will be keenly observing the developments that lie ahead.