How And Why is the Silicon Valley Bank Collapse Affecting Indian IT Midcap Companies?

A look at the Silicon Valley Bank collapse and its effect on the Indian Mid-cap tech sector.

SVB Fall Affecting Indian IT Sector

As the name suggests, Silicon Valley Bank is closely linked to the tech sector companies that are backed by American investments. Life science companies, too, have formed a significant portion of the bank’s customer base. Before its collapse, this 40-year-old bank was the 16th largest commercial bank in the USA.

Also Read: Does Silicon Valley bank collapse affect India? RBI analyses impact on the Indian financial sector 

Silicon Valley Bank and Indian Midcap Tech Stocks

Indian companies, particularly Mid-cap tech stocks with exposure to US banks as clients, have reason to be concerned by this unexpected collapse. Notably, the BFSI (Banking, Financial Services and Insurance) segment contributes between 30 to 35% of the total revenue of Indian IT firms. Silicon Valley Bank’s collapse may result in a cautious approach by other BFSI clients in the USA. This could potentially include a reduction in IT expenses. As a result, stocks of Indian companies that have contracts with American BFSI firms, banks in particular, are facing negative trading patterns in the last few days.

The bigger names in the US banking sector have so far remained unscathed in the wake of the SVB crisis. If and when these banks face the heat, a corresponding effect would emerge among larger IT firms in India, like TCS and Infosys. That said, stocks of TCS and Infosys have fallen by 8.84% and 10.98% respectively, in the last 30 days.

Also Read: The best Indian IT stocks for long-term returns

Two of the major Mid-cap IT firms in India that are facing the initial impact of the SVB collapse include:

  • Coforge – Coforge has exposure to American regional bank Fifth Third Bank. This bank fell by nearly 30% in the second week of March. Coforge shares have fallen by over 6%, from Rs 4,000 per share to Rs 3,750.
     
  • Mphasis – Mphasis does business with the First Republic Bank, whose shares fell by nearly 80% in the second week of March. It was traded at $122.07 on 6 March and was down to $23 in two weeks. Mphasis shares, on the other hand, were being traded at Rs 1822 on 20 March 2023. 30 days ago, the share price was over Rs 2210.

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Conclusion

Bank deposits in the US are covered up to a threshold under federal insurance. The vulnerable regional banks have deposits above this threshold and can therefore face fast and large withdrawals. If the liquidity of these banks proves insufficient for such large withdrawals, they may be forced to sell off assets. Consequently, these banks would be booking unrealised losses, leading to cost-cutting measures, delaying IT expenditures, and even delaying the budget cycle for the ongoing calendar year. For all of these reasons, stocks of Indian Mid-cap IT firms with US regional banking exposure are seeing red in the last few days. 

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