India’s IT sector likely to face macro headwinds until end 2023, say analysts

• Shares of the entire IT pack companies have been beaten down significantly in 2023 due to macro headwinds.
• The March quarter results of TCS, Infosys and HCL Technologies so far have also underlined the ongoing slowdown.
• The IT companies in India faced the heat after the banking crisis in the US and Europe erupted.
• Considering the macro economic challenges like high inflation, interest rates and banking crisis in regions, analysts expect the IT sector to remain watchful for at least the next few quarters.

India’s information technology services companies have been struggling amid heightened fears of recession across developed markets and the repercussions of a banking crisis in the US and Europe. And the situation is unlikely to improve until the end of the year, analysts say.

Amid the ongoing weakness in the sector, foreign portfolio investors (FPIs) have also sold their stakes in IT companies. FPIs turned bearish on the IT and oil and gas sector in March – between these two sectors, they sold equities worth ₹13,734 crore.

Analysts expect pain to continue till end of 2023
Considering the macro economic challenges like high inflation, interest rates and banking crisis in the US and European regions, analysts expect it will be a watchful few quarters for the IT sector.

"The biggest issue in the IT sector is growth slowdown and possibility of recession. So, as long as the slowdown persists and global growth remains uncertain, the market will expect lesser order flow, slower execution and pricing challenges. All these three factors will lead to IT companies suffering and valuations may also not expand. Investors will have to remain watchful for one to two quarters till there is some clarity on the global growth scenario," Deepak Jasani, head of retail research at HDFC Securities told Business Insider India.

The IT majors’ recently-posted fourth-quarter results and FY24 growth predictions tell their own story about the sector’s ongoing struggles.

For FY23, IT major Infosys reported a growth of 15.4% in constant currency terms, lower than the guidance of 16-16.5% that it had given at the end of Q3. Besides, it guided for a 4-7% revenue growth in FY24. This is the first time since FY16 that Infosys has guided for single-digit revenue growth in constant currency terms.

Bigger rival Tata Consultancy Services (TCS) reported a 11-quarter low constant currency revenue growth at $7.2 billion in Q4.

TCS’ outgoing chief executive officer Rajesh Gopinathan said in a post-earnings conference that the company is seeing stress in one of its largest markets, North America. The recovery that the company had expected had not yet materialised.

According to Sanjeev Hota, vice president, head of research at Sharekhan BNP Paribas, told Business Insider India, the macro uncertainty faced by the sector is unlikely to get better before 2-3 quarters. “(For) the entire calendar year, things look dicey and the industry may witness some kind of stability by the fag end of this year. US, North America, which are among the biggest markets for the sector, are not expected to improve in the near term."

Banking crisis could impact June-quarter earnings
The global growth slowdown has worked its way into the stock market performance of these companies with shares of the entire IT pack being beaten down significantly in 2023. The Nifty IT index is down 30% so far this year compared to a 3% fall in the broader Nifty50 index.

The IT companies in India faced the heat after the banking crisis in the US and Europe erupted in March, triggered by the collapse of Silicon Valley Bank and Signature Bank in the US and the turmoil at Swiss lender Credit Suisse.

IT majors like TCS, Infosys and Wipro have also neared their 52-week low since March considering IT companies’ exposure to US banks amid the banking sector crisis. BFSI clients are among the Indian IT companies’ largest clients.

"Most of the price damage in the IT stocks has already been done. However, outperformance of the sector from the current level seems restricted till global macro headwinds stabilises. The sector valuation multiple is driven by earnings growth and if growth tapers off, there are little chances of the (IT) stocks outperforming the broader market indices,” added Hota. He, however, recommends staggered buying in TCS among the large caps and Persistent Systems from the mid-cap stocks, for long-term investors.

The lower-than-expected growth in March quarter for sector leaders Tata Consultancy Services (TCS), Infosys and HCL Technologies have underlined the ongoing slowdown. And analysts see this spilling over to the next quarter as well.

“The banking crisis in US regional banks and European banks in March 2023 has induced greater caution and could impact the June 2023 quarter. We would not be surprised by a weak US performance across companies that are likely to report in the coming days,” said a report by Kotak Institutional Equities.

Analysts at JP Morgan have also highlighted the weakness in banking, financial services and insurance (BFSI) and telecom verticals, which would impact Tech Mahindra and Mphasis as they have high exposure to these verticals.

Stock movement of IT companies in 2023 so far
Source: NSE


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