Shares of Indian IT services providers have been under pressure at the stock exchanges amid fear of global economic slowdown that could affect spending on technology.
“We turn more bearish on the sector and highlight structural margins rather than growth slowdown should be the key sector concern,” said JP Morgan in a note
Nifty IT Index, which closed 0.34 per cent lower at 28,859.85, is nearing its 52-week low level of 26,189.40. In fact, Nifty IT index was the top loser in 2022 so far by declining a little over 26 per cent as against Nifty’s marginal decline of just 0.11 per cent.
Wipro, TechM big losers
Shares such as Wipro and Tech Mahindra crashed about 42 per cent and 40 per cent this year so far, while TCS, Infosys and HCL Tech too tumbled 14.76 per cent, 19 per cent and 28.4 per cent respectively.
According to Motilal Oswal Financial Services, increasing macro concerns and a slowdown in GDP growth, rising inflation in the US and Europe – the largest geographies for Indian IT services, and the ongoing geopolitical tensions are resulting in a near-term uncertainty in the Indian IT services space spend from retail vertical.
‘Valuations expensive’
Sharp margin misses across scale IT Services vendors in the June quarter were deeper than feared with incremental growth coming at lower margins. “We expect the margin erosion to persist in the medium term and stay meaningfully below long-term trends due to reversal in employee-employer bargaining power, underwhelming graduate uptake, limited price increases, return in travel/facility costs and high onsite inflation,” said JP Morgan.
NSEIT has underperformed the Nifty by huge margin year to date, but valuations remain expensive – crucially sharply above pre-Covid levels even as peak growth is behind and margins have structurally eroded, added the foreign brokeragee saying “investors should sell into the rally”.
‘Already factored-in’
According to Kotak Institutional Equities, "A weak economic prognosis has led to a re-look on costs, both tech and non-tech related, and can lead to a slowdown in spending baked in our estimates". However, vendor consolidation and push for low-cost outsourcing provide opportunities for the Indian IT, it added.
"We expect the impact of weak deal wins and client budget cuts to hit revenue growth with a lag. Our estimates/multiples already bake in growth slowdown in FY24E. Our pecking order is intact (TCS, Infosys, Mindtre, Persistent, Coforge) and we continue to prefer stocks that are less vulnerable to slowdown and have the potential to continue gaining market share even during that period," it added.
Macro concerns have already been factored in the recent correction in the IT Services space, said another domestic brokerage, Motilal Oswal. "We remain positive on account of sustained long-term demand. We continue to like Infosys, HCL Technologies, and TCS in tier-I and L&TTS and Mphasis among tier-II players," it added.