Since last April, Nifty has appreciated by around 10% while CNX IT in the same time frame has gone up by 57% (this after taking into account the loss of 4.2% in one day – today). IT stocks have been one of the key performers in Nifty until banking stocks started to perform better in recent times (though Bank Nifty is well below its all time high owing to the lacklusture performaces of Public Sector Banks).
A correction in IT stocks was hence well over-due and the initial trigger over the last few days has been the concern about the appreciation of the Rupee vs. the Dollar (never mind that Rupee is a long way from where we started the current depreciation journey).
Today though, IT stocks fell pretty strongly on opening bell itself owing to yesterday’s comments by Narayana Murthy where he forecast weak revenue growth in the March quarter at an investors meeting organized by Barclays. This was a pretty strong surprise owing to companies generally not commenting on the performance well before declaration of results and in recent times, the surprise has come when results were released rather than times like this.
While Infosys was hard hit today with the stock falling by 8.5% at close, its not as if heavens have broken loose. The long term trend of Infosys is still pretty strong and even after the fall, the stock is under no risk of getting into bearish territory.
Old timers may well recall that during the time when Murthy was leading Infosys, the company used to Under promise only to finally end up beating both its own and Analysts estimations. So used to this phenomeon were the markets that when during the results declared in April 2003, he cut down on the Guidance substantially, the markets were so taken aback that the stock collapsed by around 26% during the day (the single largest percentage fall the stock had seen in its history). In hindsight though, that was the most opportune time to buy the stock as it has never looked back.
Today’s fall though comes with a very different context in the sense that the stock is pretty bullish and this is the first major fall we have seen in the year. If Rupee continues to appreciate, profit booking may be seen in IT stocks owing to they being directly affected as well as the tremendous gains investors have seen and hence while the stock still is a screaming buy according to charts, the margin of safety if one were to put it is on the lower side.
The accompanying chart shows what I believe will be the major support zones if the stock continues to drop. For the stock to be seen as bullish, I would like it not to break the 2990 levels which is a very major support zone.