From Paytm to Zomato: Why these stocks are falling?
On Friday, Indian stocks concluded the day with significant losses, following dismal global cues, with IT and banking stocks being the biggest drags on benchmark indices.
Both the Nifty IT and the Nifty Bank sectoral indices declined by 2% each. Both the Nifty50 and the Sensex have lost nearly 7% year-to-date (YTD). In Friday’s session, BSE businesses lost more than Rs 3 lakh crore in market capitalization.
This year, foreign institutional investors (FIIs) have been selling Indian stocks in large numbers. The markets were plagued by expectations of a rate hike by the US Federal Reserve. Then came the conflict between Russia and Ukraine, which hastened the sell-off.
The BSE Sensex, which had been down roughly 12% since the beginning of the year, has recovered thanks to a recent surge fueled by lessening geopolitical tensions and a drop in crude oil prices. After exposure to the heat, broader markets have also regained some losses.
Here’s a list of stocks that have already dropped more than 25% in 2022:
1. One 97 Communications (Paytm): The fin-tech firm that owns Paytm has seen its stock plummet by 55 percent in 2022. Paytm’s market value has plummeted by over Rupee 1 lakh crore since its IPO, owing to a series of events, including the RBI prohibiting new client on-boarding, brokerages rating the company, and, most importantly, its valuations.
Paytm’s share price has dropped due to regulatory concerns and doubts about the company’s potential to be profitable shortly, prompting analysts to advise investors to stay away from the stock earlier. JP Morgan’s ‘overweight’ recommendation on Paytm shares has been maintained, although the target price has been reduced to R.s 1,000 from Rs 1,200.
Investors who bet on Paytm because of its strong growth prospects overlooked a critical metric: the company’s fundamentals. Paytm has a dreadful track record, as any glance at its financials will reveal.
As the debate over raising interest rates heats up, the company’s stock may continue to fall. Many investors anticipate that increasing interest rates will increase Paytm’s cost of capital, decreasing its margins on loan disbursals.
The fin-tech startup is a must-have on your phone right now but not in your stock portfolio.
2. Zomato: Zomato or Swiggy are the first names that come to mind when people think of getting food delivered. Zomato filed for an initial public offering (IPO) in July 2021, seeking up to R.s 93.75 billion in funding. Even though the company was losing money, the IPO was well received.
Despite its high valuations, the issue was 38.25 times oversubscribed, attributable to its strong brand identity and the IPO fever at the time.
To everyone’s surprise, the stock was listed at a 51 percent premium to its initial public offering price. For the next few months, the increasing trend was maintained. It didn’t last long, though. The stock has been in a downward spiral since the financial results for the quarter ended December 2021 were released.
The food aggregator’s stock has dropped 52% year to date, owing to investors’ skepticism about putting a value on a company that has yet to turn a profit. Morgan Stanley rates Zomato shares as ‘overweight,’ with a target price of R.s 135.
3. Wipro: So far, in 2022, the shares of the IT behemoth have dropped 36%. Despite the ‘Great Resignation’ and a steep increase in staff expenditures, brokerages remain wary about the sector. Experts also noted that the sector was in a severe bear market due to concerns about global GDP stalling, which would damage IT investment.
CLSA kept its ‘underperform’ rating on the stock and decreased its target price to Rs 700 from Rs 720 in January, while Nirmal Bang Institutional Equities kept its ‘accumulate’ rating on the stock and set a target price of Rs 501. Even if the stock has climbed more than 2% in the last month, it has destroyed more than 18% of investors’ wealth in 2022 (year-to-date).
4. Tech Mahindra: Tech Mahindra’s stock price has plummeted since the beginning of 2022. On a year-to-date (YTD) basis, it has dropped by about 41%. This year, all IT stocks have been in the red.
The Mahindra group’s tech major has dropped 38% YTD on concerns that it will be increasingly vulnerable in the face of a challenging demand environment and margin concerns. Morgan Stanley’s ‘overweight’ rating on Tech Mahindra shares has been maintained, with a target price of Rs 1,650, down from Rs 1,800.
5. Larsen & Toubro Information Technology: So far, in 2022, the technology company’s stock has dropped nearly 43%.Concerns about the sector’s growth stagnating and IT spending being harmed have caused some IT stocks to correct.
Analysts believe that increased onsite attrition will be a significant concern for the company in the foreseeable future and that revenue growth will be slower than anticipated. With a target price of Rs 4,570, Goldman Sachs has maintained its sell recommendation on the IT firm’s shares.
On the National Stock Exchange, individual equities like Infosys, Tech Mahindra, Wipro, Larsen & Toubro (L&T), Infotech, Coforge, Mphasis, L&T Technology Services, and Mindtree fell between 5.3 and 8%. (NSE). Tata Consultancy Services and HCL Technologies, on the other hand, declined 4% and 5%, respectively.
In comparison, at 01:41 PM, the Nifty50 index was trading 2.4 percent down at 15,850 points.
The Nifty IT index had dropped 5.1 percent in intraday trade on April 18, 2022, after Infosys published a dismal set of data for the quarter ending March 2022. (Q4FY22). The IT index has dropped 21% so far in the current financial year 2022-23 (FY23), compared to a 9% decrease in the Nifty50 index.
In a report on the IT sector, Girish Pai, head of research at Nirmal Bang Equities, said, “While we believe that Digital Transformation (DT) services will continue to be a key theme for the next several years,” “we believe that ‘willingness-to-spend’ will be constrained by ‘ability-to-spend’ as enterprise customers battle earnings pressures.
“As a result, we’re still gloomy about the IT industry as a whole.” The relative call is more difficult. Tier-1 companies are preferred over Tier-2 companies. Customers are shifting from the current democratic skills/capability’ focused vendor model to one that is more discriminating based on ‘ability-to-deliver’ cost take-outs and business model changes – in that order – beyond FY23. “It was also added.
Apart from the mentioned, here are some other stocks that have received a lot of attention.
But why is that? What happened in the IT industry that caused it to go from being a fast-growing sector to one that is currently in decline?
Continue reading to discover out…
The Nasdaq effect:
The worldwide IT sector has been hammered hard since the beginning of the year. The Nasdaq, which is dominated by technology, has plummeted.
The Nasdaq Composite index is an American stock index that includes significant technology companies like Alphabet, Amazon, SNAP, and others.
In India, the Nasdaq index is reflected in IT stocks. When the Nasdaq plummets overnight, Indian IT stocks frequently follow suit.
Consider today’s situation. Yesterday, the Nasdaq finished more than 2% lower. Today, the BSE IT index is down more than 2%.
As a result, you can see the parallel. As global tech companies have experienced a big correction, Indian IT stocks have been in the red.
To learn more about this, watch the video below, in which India’s top trader, Vijay Bhambwani, describes how the Nasdaq is dragging Indian IT companies.
The issue of attrition:
The IT industry has a high attrition rate. The rate at which employees depart an organization is referred to as the attrition rate.
Increased labor expenses are associated with high attrition rates. Tech Mahindra reported a 24 percent attrition rate in its Q4 performance.
The IT sector is expanding in terms of opportunities. On the other hand, skilled workers are scarce. As a result, employees have a variety of job options.
As a result, employers will have to pay more to keep talented people. Employees are increasingly demanding flexible working space in the post-pandemic period.
Companies will have to pay more to retain, as well as hire more personnel due to the IT sector’s development potential.
All of these factors have put pressure on IT companies’ profit margins. And Tech Mahindra has become a victim of the sell-off.
Companies will record smaller profit margins in the future, according to brokerage houses. They had expressed their alarm about the shrinking gap.
As a result, despite the IT sector’s intriguing development prospects, its financial performance has fallen short of expectations. This is also true with Tech Mahindra.
FII Buying and Selling:
In industrialized markets such as the United States, interest rates are rising. As a result, FIIs are less interested in emerging markets since the risk-free rate of return decreases.
As a result, FIIs are selling their stakes in companies based in emerging markets like India to return to the safety of the dollar. Tech Mahindra has experienced the same fate.
Since March 2021, FIIs have been selling their Tech Mahindra shares. In the quarter ending December 2020, FII’s investment was 39.6 percent.
By the end of March 2022, the share had dropped to 34.3 percent. The fact that FIIs sold their interest added insult to injury.
Following the current reorganization of the National Stock Exchange (NSE) index, new-age IT businesses Nykaa, Paytm, and Zomato have been included in the Nifty Next 50 index. It’s worth noting that none of these businesses have been publicly traded for more than eight months.
What is the Nifty Next 50 Index?
The NIFTY Next 50 is a benchmark Indian stock market index that measures the performance of the next 50 stocks listed on the National Stock Exchange after the 50 largest Indian corporations. The NIFTY Total Market, the NIFTY LargeMidcap250, the NIFTY 200, the NIFTY 100, and the NIFTY 500 indexes have all included tech stocks. https://en.wikipedia.org/wiki/NIFTY_50
The NSE announced adjustments to the qualifying requirements for stock indices on February 24, including a one-month minimum listing history requirement. Previously, three months was the minimum needed. It said that the stocks would be replaced as part of its twice-yearly assessment. The new rules will take effect on March 31, 2022. Nykaa, Zomato, and Paytm have had a rocky start to 2022.
What does the future hold for the markets?
Given the Ukraine-Russia crisis, a high inflationary environment is projected to persist in the future. High inflation can result in decreased margins, which could offer a short-term difficulty for many businesses.
Market volatility is projected to persist as the Federal Reserve raises interest rates in the coming months, putting FII investors on edge. While such corrections might induce panic, they also provide long-term investors with a purchasing opportunity.
Investors should take advantage of the sell-off by gradually increasing their long-term holdings in high-quality companies with solid fundamentals. You must remain cool in the face of the storm and seize this opportunity to make long-term investments in high-quality businesses. Read more details on Inventiva – https://www.inventiva.co.in
Edited by Prakriti Arora