Risks rise for IT sector amid weak macros, warns Kotak Institutional Equities
1 min read . Updated: 14 Jun 2022, 11:15 AM IST
Premium- Profit warning from clients of IT companies and increasing external risks make the assumption of 6-8% global IT spending growth unreasonable, Kotak Institutional Equities said
Despite a strong demand outlook by IT services providers, the worsening global macroeconomic scenario raises concern of a recession. For IT sector, this could translate into lower client spending, weighing on their demand pipeline beyond FY23.
Striking a note of caution, analysts at Kotak Institutional Equities said, "Profit warning from clients of IT companies and increasing external risks makes the assumption of 6-8% global IT spending growth, unreasonable. We moderate our stance and bake in normalized global IT spending growth of 3-4% for CY2023E and 7% for CY2022E."
Consequently, the brokerage house has trimmed the FY2023-FY2025E revenue estimates by 2-10% for IT stocks under its coverage.
In a report dated 14 June, Kotak analysts added that growth for the IT sector in the past two years was broad-based and driven by elevated client spending and vendor capacity constraints. However, a monetary policy tightening environment will mean that easy growth or benefit of low-hanging fruits will fade. "In fact growth will be a lot more polarized," it said.
Another risk for IT companies emerges from the steep depreciation seen in many global currencies against the US dollar in the June quarter.
"Cross-currency headwinds are in the range of 70-190% on a sequential basis. Our revised revenue growth estimates take into account sharper cross-currency headwinds leading to higher cut in US revenue growth estimates compared to older estimates whereas changes at the constant currency level are lower," added the Kotak report.
Investors would reckon that recently global brokerage houses Nomura Inc and JP Morgan downgraded several Indian IT stocks. They cited risks to their earnings growth estimates on concerns that corporates might scale back on their IT spends amid global economic turmoil and interest rate increases by central banks.
