IT sector weighting in Nifty50 at 5-year low of 12.2%

The recent sell-off in IT stocks such as Infosys and Tata Consultancy Services (TCS) has resulted in a sharp decline in the IT sector weighting in the Nifty50 index.

The sector’s weighting in the index has slipped to a five-year low of 12.2 per cent, down from the 17.7 per cent at the end of March 2022. The top IT companies —TCS, Infosys, Wipro, HCL Technologies, and Tech Mahindra — accounted for 13.6 per cent of the index at the end of March this year.

The combined market capitalisation of the big five IT companies is down 8.2 per cent since the start of 2023 compared to a 2.7 per cent decline in the Nifty50 index during the period.

The five ended Thursday with a combined m-cap of Rs 22.2 trillion, down from the Rs 24.2 trillion at the end of December and the Rs 23.7 trillion at the end of March this year.

The combined m-cap is down 28.3 per cent in the past 15 months from a record high of Rs 31 trillion at the end of December 2021. For comparison, the benchmark index is up 1.6 per cent during the period.

With the recent decline, the IT sector has given way to FMCG (fast-moving consumer goods) companies and is now the third-biggest component of the benchmark index, slightly ahead of the oil and gas sector.

FMCG companies such as Hindustan Unilever, ITC, Asian Paints, Nestle, and Britannia together have a 12.6 weighting in the Nifty 50, up 270 basis points since March 2022. Banks, non-banking financial companies, and insurance companies (BFSI) remain at the top with 37.3 per cent, up from the 34.5 per cent at the end of March 2022. Other big sectors to gain in the past one year include automobiles, and construction and infrastructure.

The IT sector has now given up most of the gains in market capitalisation in the post-pandemic period and has become one of the biggest laggards on the bourses. However, the sector remains an out-performer on a longer-term basis. The combined market capitalisation of its top five is up 110 per cent since the end of December 2017 compared to a 67.4 per cent rise in the Nifty 50 index during the period.

The near-term outlook of IT companies has worsened due to a lower than expected revenue and earnings growth reported by Tata Consultancy Services and Infosys in Q4FY23. This forced many brokerages to cut the earnings and share price targets of these two companies for FY24.

“Infosys reported a weak Q4FY23 revenue of $4.55 billion, down 3.2 per cent Q-o-Q, significantly below our estimate of 0.6 per cent Q-o-Q growth. We expect the big revenue miss and elevated uncertainty to adversely impact the stock’s short-term performance. We have lowered our FY24/FY25 EPS estimates by 4 and 5 per cent respectively to factor in the Q4FY23 miss and FY24 guidance,” write analysts at Motilal Oswal Financial Services after Infosys results for Q4FY23.

It’s the same for Tata Consultancy Services. “TCS reported operating performance that was slightly below estimates. The long-term demand story remains intact led by cloud adoption and data analytics across enterprises. However, clients remain cautious and are taking longer time for decision making and are slowing down discretionary IT projects and this would result in lower revenue growth in FY24,” write analysts at YES Securities after TCS’s Q4FY23 results.