With top-tier companies such as Tata Consultancy Services Ltd and Satyam Computer Services Ltd trading near-historic lows of about 10 times their earnings per share, it’s evident that investors have scant expectations of Indian IT firms. The big concern now is how low earnings growth could go in the next fiscal year. According to one school of thought, earnings may even decline next year because of the global slowdown.
While IT companies won’t comment on next year’s performance until next April, this quarter’s commentary will give a peek at how they expect to end the current fiscal year. Normally, IT analysts use the fourth quarter results as a base for estimating the next year’s earnings. Already, the markets expect Infosys Technologies Ltd to cut its guidance estimates for the current year, partly owing to the sharp appreciation of the dollar versus European currencies and partly because of the global slowdown. But if growth estimates are cut by more than 3-4 percentage points, that would be a sign that the second half of the year will be weaker than what markets have been estimating.
With valuations of IT stocks already so low, could they go down further? The more pertinent question is how IT stocks would behave when there is a turnaround, because valuations of most stocks in the market are at low levels. It’s important to note here that investors are unlikely to see any positive triggers in the near to medium term.
On the other hand, results announcements and commentaries are likely to be disappointing affairs, which essentially means that the upside will be limited. It seems better for investors to stick with domestic themes, where news flow can be expected to be better.