Benchmark equity indices snapped their six sessions gaining streak and plunged over 1% on Friday amid weak global cues as well as weakness in heavyweights such as Infosys, TCS, HCL Technologies, Reliance Industries (RIL), and Hindustan Unilever Ltd (HUL). The information technology (IT) stocks witnessed a sharp sell-off after index heavyweight Infosys sharply lowered its revenue growth guidance for FY24, which spooked investor sentiments.

The BSE Sensex declined as much as 923 points, or 1.36%, to hit an intraday low of 66,649, and the NSE Nifty tumbled 246 points, or 1.23%, to 19,733 levels. Despite the sell-off in benchmark indices, the broader market managed to recover from early losses and the BSE midcap and BSE smallcap indices rose up to 0.2%.

On the sectoral front, BSE IT and TECk indices were hammered following disappointing earnings by Infosys. While the BSE IT index tumbled 4.2%, the BSE TECk index dropped 3.7%, led by Infosys, Tech Mahindra, HCL Technologies, Wipro, TCS, and others.

In the last month, Indian equities witnessed a strong rally and outperformed the entire emerging market (EM) basket and China by a wide margin, driven by strong macro data, sustained fund inflows by foreign investors, robust GST collections, and rapid progress in monsoon. The BSE Sensex and Nifty50 gained over 5.5% during the period and touched their respective 52-week highs.

Here are five factors that fuelled sell-off in the market today:

Sharp cut in revenue guidance by Infosys

The IT index witnessed broad-based selling today, led by Infosys which dropped over 9% after the country’s second-largest software exporter sharply lowered its revenue growth guidance for FY24. Among others, Tech Mahindra, HCL Technologies, Wipro, TCS fell in the range of 2-4%.  

Infosys has projected its FY24 revenue guidance to be in the range of 1-3.5% in constant currency (CC) terms, compared to the earlier forecast of 4-7%. The company trimmed the revenue guidance even after the total contract value hit an eight-quarter high of $2.3 billion in the April-June period of FY24 (Q1FY24).

According to analysts at Axis Securities, the management is cautious about the demand scenario in North America. However, Europe stands comparatively resilient. “Given the company’s medium-term challenges on demand and uncertain supply-side constraints, we expect Infosys to report moderate growth in FY24,” the brokerage says in a report.

Disappointing earnings by HUL

FMCG heavyweight HUL has reported lower-than-expected earnings in the June quarter due to weak demand amid a challenging operating environment. Reacting to Q1 results, HUL shares fell as much as 3.7%, while other sectoral leaders ITC and Marico were also reeling under selling pressure.

HUL recorded a standalone net profit of ₹2,472 crore for the quarter ending June 30, 2023, up 8% from ₹2,289 crore in the year-ago period. Sequentially, the profit dropped 10% from Rs 2,552 crore in the previous quarter. The revenue for the quarter surged 7% to ₹14,931 crore, while the Earnings before interest, tax, depreciation, and amortisation (EBITDA) climbed 8% to ₹3,521 crore versus ₹3,247 crore in Q1 FY23. The EBITDA margin increased by 40 bps to 23.6% as compared to the same period last year.

Weakness in RIL ahead of Q1

The market sentiment was further dented by strong selling in RIL shares ahead of its first quarter earnings slated to be released post-market-hours today. Snapping four sessions losing streak, shares of RIL, the biggest heavyweight on domestic bourses, declined over 3% as investors resorted to profit booking ahead of Q1 results.

Foreign brokerage Morgan Stanley expects RIL’s EBITDA and net profit to fall by 0.5% and 19% QoQ, respectively. Oil to Chemicals EBITDA is expected to drop by 4% QoQ, despite the sharp correction in refining margins. The telecom arm, Jio is projected to report flattish EBITDA margins and average revenue per user (ARPU) QoQ at ₹180, with net addition of 8 million subscribers. 

Reliance’s consolidated net sales are likely to be at ₹2.14 lakh crore and net profit is estimated at ₹16,995.50 crore, according to Bloomberg survey of brokerages.

Weak global cues

The negative cues from global peers also injected negativity in the market. In the overnight trade, the U.S. markets ended lower, weighed down by disappointing earnings reports by Netflix Inc and billionaire Elon Musk-led Tesla. The Nasdaq 100 registered its second-worst day of the year as investors reacted sharply to corporate earnings.

In the Asia-Pacific region, most of the markets ended in negative terrain as investors digested Japan's consumer price index data for June. Japan’s Nikkei 225 fell 0.6%, while China’s Shanghai SE Composite Index dropped 0.2%. The equity markets in Australia and New Zealand also settled in red.

Technical Outlook

Nifty breezed past the 19,950 objective lined up yesterday, with no visible signs of exhaustion yet. The only possible sign of vulnerability is that the last 200 point ascent has unfolded without as much volume as that seen around 19,770, according to analysts at Geojit Financial Services.

“We will play this construct by maintaining an upside view, as long as dips are held above 19910. However, inability to push beyond 19,970 on the bounce, or a direct slippage past 19880, may sign weakness, but not necessarily a drop all the way to 19,770. Prospects of 20,050- 120 in the coming days will be alive as long as Nifty manages a close above 19,880-910,” the brokerage said in its report.

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