IT stocks have seen more than 25% drop YTD, but brokerages, analysts say it's not all gloom & doom

JP Morgan has issued a note saying that it doesn't recommend buying the stocks now, adding that a conservative guidance by the companies would drive prices down, giving a good entry point.

Jefferies has said that the 26 percent tariff on India won't be too disruptive from a "relative perspective", but added that "bigger worries" would be a negative US economic outlook which would be negative for Indian IT services and other exporters. In its report on the tariff impact, the brokerage showed the exposure of Indian software exports to the US market.

Nomura has said that while the tariff war could affect India in the near term, it could lead to the country having enhanced access to the US market. But the brokerage's analysts added there is a bigger risk to Indian companies from "lower global growth, increased trade factionalism and the reluctance of manufacturers to revive the dampened capex cycle in India in the face of these uncertainties".

How to position yourself

Market veterans like Prashant Khemka, Founder and Managing Director of WhiteOak Capital Management, has said that they don't take big investing calls based on macroeconomic outlook and using a top-down approach.

In conversation with CNBCTV18's Editors' Roundtable, Khemka said, "It is foolhardy to have high conviction in certain matters, like having a high conviction on (the outcome of a) coinflip. Most of the macro is of that kind."

He said that it could even be that the worst point has been crossed and that the news, incrementally, could be better.

Khemka said that WhiteOak Capital does not take big macro calls on sectoral mix in their portfolios, and they usually stick closer to the benchmark with a few variations. He cited the example of the COVID period when tech stocks were falling and the general belief was that investors had to exit the sector.

Khemka said, "When COVID hit, there was a dramatic fall in tech sector, it saw one of the most dramatic falls... If I had taken a call at that time, exactly five years ago on April 4, 2020, it seemed very, very logical to sell out of the tech sector and load up on pharma... but that would have been the most disastrous call. The hit you take on one such call does not spoil just a year or two but it often spoils the entire cycle, which can span over seven-eight cycles. Such macro calls have spoiled the entire careers of some people."

Khemka said if the IT sector had a disproportionately high representation in their portfolio, they would have reduced that exposure because of the uncertainty, but the sector does not have such a high share in their holdings.

"Right now, the domestic sectors are fairly well-represented in the portfolio not because we were anticipating something like this (the tariff war) but because the financial sector has a very health representation in our portfolio. The same is the case today as well," he said.

"Domestically oriented sectors are likely to do better operationally. From a stock return perspective, (the outcome) remains to be seen. Five years ago, the consensus was that pharma was the place to be but pharma turned out to be one of the worst-performing sectors since COVID, so what the operating metrics do and what the stocks do may be extremely different," he said.

Khemka has holdings in midcap IT, which they have held for eight years now or one full cycle. He said, "We believe we are in companies that would, over time, outperform the tech sector and (that which would) gain market share."

Not all IT major will be uniformly affected, pointed out Siddharth Khemka, Senior Group Vice President and Head of Research (Retail) at Motilal Oswal Financial Services. "Companies with 30-40 percent revenue from the US will feel the heat,” he said.

In a report, brokerage Geojit has captured IT majors' exposure to the US market, to track which could be most vulnerable (see image below).

Ambareesh Baliga, a stock market veteran, believes the market will take a while before taking any directional bet. "The markets hate uncertainty, and this announcement just opens a fresh front of unpredictability. That’s why you’ll see knee-jerk moves — autos, IT, export-oriented names getting hit — but over the next few days, the Street will wait to see how countries react before making any real directional bet,” he said.

Marcellus Investment Managers' Arindam Mandal has a similar opinion: that the real picture is yet to emerge. "This looks more like a negotiating stance than a hard policy shift. Trump has always used tariffs as a tool to draw countries into bilateral talks, especially during election cycles. So, while it sounds alarming, it’s likely he’s leaving room to dial it down, if the other side plays along,” he said. Mandal emphasised that the initial market reaction might be sharp, but the real game would unfold over negotiation timelines.

(With inputs from Khushi Keswani.)