BackIT stocks may remain under pressure: Here is why
Cross-currency headwinds and widespread personnel churn that results in salary increases might possibly exacerbate the difficulties, analysts predicted.
PremiumAccording to analysts, pressure on information technology (IT) stocks is anticipated to persist in the near future due to factors including the unstable financial markets and the worsening economic conditions in important global economies. The largest software exporter in the nation, TCS, began the most recent results cycle on Friday with a 5.2% increase in net profit for the June quarter. However, IT shares have been falling, with the BSE Information Technology index falling about 24% so far in 2022.
Cross-currency headwinds and widespread personnel churn that results in salary increases might possibly exacerbate the difficulties, analysts predicted, particularly in terms of the effect on operating margins. The ongoing political happenings in the United Kingdom, where Rishi Sunak, an Indian-origin man, has declared his candidacy for prime minister, are also being closely observed, even though it is too soon to draw any conclusions. Sunak is the son-in-law of N R Narayana Murthy, the co-founder of Infosys.
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The five IT components of the 30-share benchmark Sensex have fallen up to 43% this year, reflecting the gloom. Tech Mahindra has decreased by 42.68 percent so far in 2022, Wipro has decreased by 41.38 percent, and HCL Technologies has decreased by 25.38 percent. The fall has been 12.63% and 19.87%, respectively, in the cases of TCS and Infosys, the IT bellwethers.
"In the US and Europe, the macro environment shows signs of worsening... There will be an impact on the IT sector... IT stocks are likely to remain under pressure," Aditi Patil, Research Associate at brokerage firm Prabhudas Lilladher told PTI.
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In 2022 so far, the BSE Information Technology index has tumbled 9,046.44 points or 23.90 per cent. It had hit its 52-week low of 26,827.24 on June 17 this year. On January 17, it reached its all-time high of 38,713.3 points.
In 2022, the Sensex lost 3,771.98 points, or 6.47 percent. On June 17, it fell to a 52-week low of 50,921.22. While IT businesses are likely to have some margin erosion owing to cross-currency challenges in the near term, vendor consolidation and captive monetisation efforts will assist gain market share, according to Tanusree Banerjee, Co-Head of Research at Equitymaster.
"The outlook for the long term remains good with deal pipelines remaining strong," Banerjee added.
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The information technology services sector would have a dramatic decline in revenue growth to 12–13% in FY23 from 19% in FY22, according to a forecast published last week by rating agency Crisil.
According to Apurva Prasad, VP for Institutional Research - IT at HDFC Securities, the medium-term outcome for the IT sector is highly likely to be double-digit growth, and the structural drivers outweigh any macro-variability.
"Risk-reward is favourable for tier-1 IT as current valuations imply a modest growth ask-rate; at the same time, mid-tier IT will sustain its growth premium. We have a constructive stance on the IT sector," Prasad said.
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V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services, said IT stocks, after the recent sharp correction, are now fairly valued.
"However, there are concerns arising out of the fallout from a possible recession in the US and sharp slowdown in other key markets," he said, adding that the TCS first quarter results indicate good revenue situation but there is pressure on margins due to salary hikes for employees.
While noting that IT stocks are likely to remain under pressure, Aditi Patil said, "I believe for the coming results (of other IT companies), there won't be positive surprises... Stock prices will remain under pressure. IT stocks may fall further from this level."
TCS Managing Director and CEO Rajesh Gopinathan, on Friday while announcing the quarterly results, hinted that this was the bottom for the margins, attributing the fall to annual wage hikes and promotions.
At a time when worries are being expressed about recessionary pressures in countries like the US, which is the biggest market for TCS, Gopinathan had said it has been doing client surveys to look for any early signs of softening in demand for its services.
"We are seeing steady demand from our immediate conversations with customers for the short term to medium term. So, all projects that are currently going on, pipeline conversions... all of that indicates a steady demand environment," he had said.
"In senior-level discussions, there is increasing discussion about the recession, no different from what you and I are reading in newspapers. We don't see an immediate footprint of it on our demand side. From a pipeline perspective also, the pipeline build is quite strong and the nature of deals is also remaining strong," he had said.
According to the Crisil report, the current depreciation in the rupee, and strong demand for new age technologies like artificial intelligence, cloud computing and Internet of Things will help the over USD 220-billion sector maintain double-digit growth.
(With PTI inputs)
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