Nasscom has better visibility, but haze lingers
Even if we were to assume for a moment that growth rates in the IT sector turn out to be how Nasscom expects them to be in FY19, there’s nothing much for investors to get excited about
A year ago, Nasscom had deferred the release of its annual revenue forecast by three months, citing uncertainties in the short term. From the looks of it, it has better visibility this year. The software services industry lobby said it expects export revenues to grow between 7% and 9% in fiscal year 2019 (FY19). Revenues are estimated to grow 7.8% in FY18, suggesting that a marginal pickup in growth is likely.
But all this is assuming Nasscom’s estimates are very reliable. Industry experts point out that the methodology used to come up with the forecasts is unscientific, and that they are more like guesstimates. In fact, this column has suggested Nasscom should retire its annual forecasts permanently.
There were signs of randomness in Nasscom’s statements this year as well. It said spends on digital services will grow 1.5-2 times overall growth rates in FY19. This implies growth of 18% at best, which is significantly lower than the 30% growth in digital services this year. According to an analyst at a multinational brokerage firm, this means that traditional services need to grow by over 6%, which he says is not possible. After all, large companies such as Tata Consultancy Services Ltd and Wipro Ltd have been reporting more or less flat revenues on this count in recent quarters.
But even if we were to assume for a moment that growth rates turn out to be how Nasscom expects them to be in FY19, there’s nothing much for investors to get excited about. Growth is expected to improve marginally, whereas investors have priced in meaningful improvement in growth in the coming year. “That CY2018 will be better than CY2017 seems to be generally accepted and shows up in IT sector re-rating; 2-3% higher growth in FY2019 is already baked into the stock prices,” analysts at Kotak Institutional Equities wrote in a 29 January note to clients.
Earlier this month, Cognizant Technology Solutions Corp. disappointed IT bulls when it announced a similar outlook on growth as the year before. In fact, adjusted for currency tailwinds, its forecast suggests a marginal deceleration in growth.
It is likely that the hope-based rally in IT stocks will continue until Infosys Ltd or some large India-based IT company brings a reality check.
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