IT stocks set to remain under pressure amid global headwinds: analysts
New Delhi: Information technology stocks are expected to remain under pressure in the near term amid headwinds emanating from deteriorating economic conditions in major global markets and financial market volatility, analysts said.
As the country’s largest software exporter, TCS, on Friday reported a 5.2% increase in net profit in the June quarter, kicking off the latest earnings cycle, IT stocks fell, the BSE IT Index having fallen nearly 24% so far this year.
Cross-currency headwinds and large-scale talent turnover driving higher salary increases could also add to the challenges, particularly in terms of impacting operating margins, analysts said.
While it’s early to draw conclusions, ongoing political developments in the UK, where Indian-born Rishi Sunak threw his hat in the ring to become prime minister, are also being closely watched. Sunak is the son-in-law of Infosys co-founder NR Narayana Murthy.
“In the US and Europe, the macro environment is showing signs of deterioration…There will be an impact on the IT sector…IT stocks are likely to remain under pressure,” partner Aditi Patil told PTI. research at Prabhudas Lilladher brokerage firm.
Reflecting the negativity, the five IT components of the Sensex 30-stock benchmark have fallen as much as 43% this year.
So far in 2022, Tech Mahindra has plunged 42.68% while Wipro has fallen 41.38% and HCL Technologies has fallen 25.38%. In the case of TCS and Infosys, the IT leaders, the decline was 12.63% and 19.87%, respectively.
In 2022 so far, the BSE Information Technology Index has fallen by 9,046.44 points or 23.90%. It had hit a 52-week low at 26,827.24 on June 17 this year. On January 17, it reached its all-time high of 38,713.3 points.
The Sensex has lost 3,771.98 points or 6.47% so far this year. It hit its 52-week low at 50,921.22 on June 17.
Tanusree Banerjee, Equitymaster’s co-head of research, said while IT companies are likely to face margin pressures due to near-term cross-currency headwinds, vendor consolidation and efforts to Captive monetization will help gain market share.
“The long-term outlook remains good, with deal pipelines remaining strong,” Banerjee added.
Last week, ratings agency Crisil said in a report that the information technology services sector would see a sharp drop in revenue growth to 12-13% in FY23 from 19. % in fiscal year 22.
Apurva Prasad, VP Institutional Research – IT, HDFC Securities, said there is a strong likelihood of double-digit growth for the IT sector over the medium term and structural drivers more than offset any macro variability.
“The risk-reward ratio is favorable for Tier 1 computing, as current valuations imply a modest growth rate; at the same time, midrange computing will maintain its growth premium. We have a constructive stance on the IT sector,” Prasad said.
VK Vijayakumar, chief investment strategist at Geojit Financial Services, said IT stocks, after the recent sharp correction, are now properly priced.
“However, there are concerns about the fallout from a possible recession in the United States and a sharp slowdown in other key markets,” he said, adding that TCS’ first quarter results point to good revenue situation, but that there is pressure on margins due to wages. hikes for employees.
While noting that IT stocks are likely to remain under pressure, Aditi Patil said: “I think for the results ahead (of other IT companies), there won’t be any upside surprises… Stock prices will remain under pressure. IT stocks could fall further from this level.
When announcing quarterly results on Friday, TCS Managing Director and CEO Rajesh Gopinathan hinted that it was the margin bottom, attributing the drop to annual salary increases and promotions.
At a time when concerns are being raised about recessionary pressures in countries like the United States, which is the biggest market for TCS, Gopinathan said he had conducted customer surveys to look for any early signs. a slowdown in demand for its services.
“We see a constant demand for our immediate conversations with customers in the short and medium term. So all the ongoing projects, pipeline conversions… All of that points to a stable demand environment,” he said.
“In high-level discussions, there is more and more discussion about the recession, which is no different from what you and I read in the newspapers. We do not see the immediate imprint of this on the demand side. From a pipeline perspective as well, the construction of the pipeline is quite solid and the nature of the agreements also remains solid,” he said.
According to the Crisil report, the current depreciation of the rupee and the strong demand for new era technologies like artificial intelligence, cloud computing and the Internet of Things will help the sector of more than 220 billion dollars to maintain growth. two digits.