Research analysts that have spoken to information technology companies of late are losing no time in downgrading their earnings estimates.
CLSA Asia-Pacific Markets and Prabhudas Lilladher have downgraded Infosys Technologies Ltd this week. As Prabhudas Lilladher’s analysts, Apurva Shah and Jaspreet Chhabra, point out in their research note, “The demand environment in the last few weeks appears to have turned materially negative for the company. The Infosys management spoke about more project delays and cancellations and the inflow of new orders also appears to have significantly reduced compared with the trend a few months ago.”
CLSA analysts didn’t feel very differently either. It has said that revenues are likely to grow by just 3% in dollar terms in the next financial year. That’s far lower than estimates on the street.
Prabhudas Lilladher’s analysts say they won’t be surprised if the current year’s guidance is cut even further. Infosys had already cut its dollar-revenue guidance for the year substantially in October. One of the worries the markets have had about the IT sector is that vendors may start offering price discounts when volumes fall, just like they did in the last slowdown in 2001.
IT companies, however, have said the situation now is different. Back then, there was a pricing bubble due to the dotcom boom, which burst. Pricing has been much more reasonable lately, according to them.
But Shah and Chhabra say the drop in demand has resulted in aggressive pricing by Infosys’ competition. Their report says the Infosys management provided a few instances of global and local firms winning deals at half the usual offshore dollar rate.
It’s surprising these first instances of price cuts aren’t leading to a higher drop in the valuation of IT stocks. The CNX IT Index has outperformed the Nifty index on the National Stock Exchange by about 9% this year.
True, IT shares had underperformed even in the past year, but considering the pace at which things are deteriorating for the sector, one would imagine IT stocks would take some more beating.
Infosys is considered to be the best performing company in the sector, and if it is expected to grow by a mere 3% next year, one can only imagine how bad things can get for other players in the sector.
Based on recent developments, earnings are sure to drop in the next fiscal for a number of companies, leaving room for further correction in their stock prices.
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