IT stocks from the likes of Tata Consultancy Services (TCS), Infosys and Wipro succumbed to selling pressure on Wednesday, as investors geared up for the onset of the quarterly earnings season. The Nifty IT index fell as much as 2.4 percent during the session before finishing the day down 1.9 percent -- its worst single-day plunge since December 20.

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All of the 12 constituents of the Nifty IT basket ended in the red, falling 1-3 percent each. TCS dropped 0.6 percent for the day, Infosys 2.9 percent and Wipro 1.1 percent. HCL Tech, Tech Mahindra, Mphasis, Mindtree, L&T Infotech, L&T Technologies and Coforge also declined.

The IT index had surged nearly three percent in the past four sessions.

The speed bump for the basket comes at a time when IT stocks have been powering much of the rally in the market in the past few months.

A number of analysts have flagged valuations of the IT basket to be expensive.

"IT stocks have run up way ahead of expectations... Some profit booking appears to be taking place now as market participants await the coming earnings season. Most IT stocks have overheated in the overall market rally in the past 18 months or so," AK Prabhakar, Head of Research at IDBI Capital Markets, told CNBCTV18.com.

As of Wednesday's closing levels, the Nifty IT has surged 149.7 percent in the past 18 months, as against the Nifty50's 66.5 percent return.

JC Parets, Founder and Chief Strategist at All-Star Charts, sees another 20-25 percent upside in the Nifty IT in the year ahead. In an interview with CNBC-TV18, Parets said he expects individual components to outperform the market.

"You have got 40-45 percent upside in TCS; if TCS is above Rs 3,500 per share, you can own it. I think it goes to Rs 5,000," he said.

IT stocks have been in high demand during the pandemic with increased demand for technology across sectors.

"IT stocks seem extremely well placed to benefit from the digitisation and automation mega-trends over the next five years. Also, it is not just the IT behemoths but also the IT mid-caps and small-caps that have enormous headroom for growth," Tanushree Banerjee, Co-Head of Research at Equitymaster, told CNBCTV18.com.

"Given the volatility in exchange rates, near-term earnings could be a bit volatile in 2022. Investors must be extremely careful about IT stock valuations," she said.

TCS, Infosys and Wipro will kick off the earnings season on January 12 by reporting their financial results for the December quarter.

IDBI Capital's Prabhakar likes Zensar (his target price: Rs 620) and Birlasoft (target Rs 630) at the current juncture. "Everything has run-up... One needs to buy something where the safety net is there," he added.

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(Edited by : Akanksha Upadhyay)

First Published:Jan 5, 2022 1:26 PM IST