IT Stocks Crash! Nifty IT tumbles nearly 5% after rallying 7% in recent sessions — Should investors worry?

Information technology stocks came under sharp selling pressure on June 3 after weakness in the American Depository Receipts (ADRs) of Infosys and Wipro weighed on sentiment.

The Nifty IT index, which had recently shown signs of a technical breakout, fell nearly 5 per cent in early trade and slipped below the key 30,000 level.

Market expert Anil Singhvi said investors should closely track important support levels before concluding whether the recent breakout has failed. He added that despite the correction, the broader technical structure of the IT index remains better than it was over the past two months.

Nifty IT loses momentum after recent rally

The Nifty IT index witnessed sharp volatility over the past few sessions. The index was trading around the 29,000 level on May 29 and rallied to close at 31,116.55 on June 2, gaining 2,116.55 points or about 7.3 per cent during the period.

However, the rally came under pressure on June 3. At 10:24 am, the Nifty IT index was trading at 29,673.50, down 1,443.05 points or 4.64 per cent from the previous close.

Despite the sharp decline, the index was still higher by 673.50 points, or around 2.3 per cent, compared with its level of around 29,000 on May 29.

According to Singhvi, the index had remained strong for three consecutive sessions and was forming higher highs and higher lows, indicating improving momentum.

One of the key positives was that the index had managed to close above its 50-day moving average (DMA), placed near 29,650, for two straight sessions.

He noted that the 29,600-30,000 zone had acted as a major resistance area for nearly two months. Every time the index approached those levels, selling pressure emerged and pushed it lower.

Key levels remain crucial

Singhvi said the sustainability of the breakout will depend on how the index behaves around key support levels. According to him, the breakout remains valid as long as the Nifty IT index stays above 30,000 and continues to hold above 31,000 on a closing basis.

The next major resistance level for the index is 32,134, which was the high recorded on April 16 before the sector entered a correction phase.

He said a close above 32,134 could signal the beginning of a much stronger uptrend in information technology stocks. At the same time, Singhvi said investors should not turn negative on the sector unless the index closes below 29,600.

He added that a close below that level would indicate that the breakout has failed and that weakness has returned to the sector.

Infosys and Wipro ADRs trigger concerns

Investors are also tracking weakness in the ADRs of Infosys and Wipro in the US market. Infosys ADR declined around 2.5 per cent, while Wipro ADR fell nearly 8 per cent.

According to Singhvi, the fall in Wipro ADR should be viewed in the context of its earlier sharp rally. He pointed out that Wipro ADR had surged nearly 18 per cent in a single session recently without any major trigger.

As a result, part of the recent decline appears to be a correction following that unusually strong move. Singhvi also noted that movements in Wipro ADR have historically been more volatile than the stock's performance in the domestic market.

Factors behind weakness in IT sentiment

Singhvi highlighted several factors that may have affected sentiment across technology services companies. One factor was weakness in shares of Cognizant following broker downgrades in the US market. The development affected sentiment across the broader IT services space.

Another factor was increasing investor attention towards artificial intelligence-focused companies such as Anthropic. Rapid developments in artificial intelligence have led to concerns about the long-term business outlook for traditional IT services firms.

However, Singhvi said these concerns do not indicate any major deterioration in the overall outlook for the Indian IT sector. He believes ADR weakness may slow the pace of the recent rally but is unlikely to trigger panic selling in the sector.

IT stocks trade sharply lower

IT stocks came under broad-based selling pressure on June 3, with TCS leading the decline, falling 7.20 per cent to Rs 2,270.70. LTIMindtree dropped 6.89 per cent to Rs 4,042.70, while Persistent Systems, Coforge and Tech Mahindra declined between 4.6 per cent and 5 per cent.

Infosys, HCL Technologies and Mphasis also traded lower, while Wipro and OFSS saw relatively smaller declines.

Despite the correction, analysts remain positive on select IT stocks. Coforge continues to be Anil Singhvi's preferred mid-cap IT pick. At the current price of Rs 1,447.60, his target prices of Rs 1,850, Rs 2,100 and Rs 2,500 suggest potential upside of about 28 per cent, 45 per cent and 73 per cent, respectively.

Singhvi believes the company could benefit from a recovery in the BFSI segment, supported by a strong order book, attractive valuations and investments in artificial intelligence.

Among large-cap IT companies, LTIMindtree and TCS are seen as key beneficiaries of rising AI-led technology spending, although some brokerages remain cautious about the impact of AI on traditional IT services.

Mphasis also continues to attract positive recommendations from analysts due to expectations of strong deal wins and AI-driven growth opportunities.

Morgan Stanley has a target price of Rs 2,880 on TCS, implying upside of nearly 27 per cent, while Citi's target price of Rs 1,300 for Infosys indicates a more modest upside of around 6 per cent.

Based on current target prices, Coforge offers the highest upside potential among the major IT stocks.