The stress in the global economy has cast a dark spell on the stocks of the Indian IT industry. The shares of the top Indian IT players have taken a major beating since a majority of their revenue comes from clients worldwide. The shares of the three IT majors have fallen up to 38 per cent in the last one year. While Infosys is down 15.87 per cent, stock of Wipro has plunged 38.59 per cent during the period. Shares of TCS are down 21.32 per cent in a year. The bleak outlook for the IT sector is also reflected in the fall in IT stocks during the last one year.
The BSE IT index has declined 18.15 per cent or 6,312 points in the last one year. On the other hand, Sensex and Nifty have gained 2.40 per cent (1,407 pts) and 2.72 per cent (475 pts) , respectively, during the period. Similarly, the index has plunged 25 per cent or 9,478 points in 2022. On the other hand, Sensex and Nifty have gained 3.27 per cent (1,907 pts) and 3.69 per cent (641 pts) during the same period.
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The business of the Indian IT industry has been impacted by the ongoing Russia-Ukraine war, economic slowdown, highly volatile global markets and bleak earnings outlook. ┬а
The earnings outlook of the Indian IT firms is also likely to be affected amid the global economic gloom.
“The EBIT margins for IT companies shrank further in Q1FY23 and are now below pre-covid levels for tier-1 companies in the sector. The companies had reduced their margin guidance at the start of FY23, but we believe continued pressure due to elevated attrition levels is likely to result in margins dropping near the lower end of guidance,” a report by ICICI Securities said. ┬а
The global economic stress has prompted financial services company Goldman Sachs to downgrade top Indian IT services players Tata Consultancy Services (TCS) and Infosys to ‘sell’ from the previous ‘buy’ stance. However, it has upgraded Wipro to “buy” from “sell,” citing attractive valuations and a recent pickup in the company’s order book.
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The downgrade for TCS and Infosys comes as Goldman Sachs sees a potential slowdown in dollar revenue growth in the face of impending macroeconomic stress for both firms.
Under the effect of slowdown, several top tier companies missed profit estimates in the April-June quarter due to higher costs. Goldman Sachs has also cut FY24E dollar revenue growth forecast for the top 5 Indian companies.
“The Indian IT sector benefitted from three secular tailwinds during the pandemic: outsourcing, offshoring and digitalisation on the back of accelerated cloud migration. Given the upcoming macro slowdown (not recession) our macro team expects, which is percolating down multiple leading demand indicators, we believe Indian IT sector USD revenue growth will start to materially slow down from here, weighing on the secular tailwinds highlighted above. Hence, we cut our FY24E dollar revenue growth forecast for the top 5 companies by 4 ppt to 6% yoy on average vs. our earlier forecast of 10%,” Goldman analysts said in a note.
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Goldman┬а Sachs said it remains “more sanguine” on the EBIT margin forecasts than on revenue of Indian IT companies, given multiple levers such as higher employee utilisation, controls on variable pay and annual wage hikes.
Meanwhile, the BSE IT index was trading lower 427 points lower at 28,311 today.┬а Nifty IT index too lost 406 points to 27,731.┬а The fall in the IT stocks comes on the back of weakness in the US markets due to higher than expected inflation, which signaled aggressive rate hikes were in offing, posing a risk to the economy’s growth.
The broader market too was trading lower with Sensex down 398 points to 59,948 and Nifty down 118 points to 17,885 in line with highly volatile global markets.
