Despite fears of recession in developed markets and the repercussions of a banking crisis in the US and Europe, India’s IT sector have struggled. The situation is unlikely to improve until the end of the year.
Investors turned bearish on the IT and oil and gas sectors in March – between these two sectors they sold equities worth ₹13,734 crore.
Pain is expected to continue until the end of 2023, according to analysts
In light of macroeconomic challenges like high inflation, interest rates, and the banking crisis in the US and Europe, analysts expect IT companies to face a challenging few quarters.
Deepak Jasani, head of retail research at HDFC Securities, informed Business Insider India that IT sector faces the biggest issue of a growth slowdown and the possibility of recession. While this persists and global economic stability remains uncertain, investors should remain vigilant for one to two quarters until they acquire clear information on the global growth outlook. These factors can lead to weakened performance among IT companies and their valuations may also stagnate.
IT majors’ fourth-quarter results and FY24 growth predictions reveal the sector ongoing challenges.
Compared to its guidance of 16-16.5% at the end of Q3, Infosys reported a 15.4% growth in constant currency terms for FY23. In addition, Infosys guided for a revenue growth of 4-7% in FY24. This is the first time Infosys has guided for single-digit revenue growth since FY16.
Tata Consultancy Services (TCS) reported Q4 revenue growth of $7.2 billion, its lowest in 11 quarters in constant currency.
During a post-earnings conference, TCS’ outgoing CEO Rajesh Gopinathan said the company is experiencing stress in one of its largest markets, North America.
According to Sanjeev Hota, vice president, head of research at Sharekhan BNP Paribas, the macro uncertainty facing the sector is unlikely to improve before 2-3 quarters. “It looks like things will be dicey throughout the entire calendar year, but by the end of the year, the industry may be stable.” It is unlikely that the US, North America, which are among the biggest markets for the sector, will improve in the near future.”
Earnings for the June quarter could be affected by the banking crisis
Shares of the entire IT pack have been beaten down significantly in 2023 due to the slowdown in global growth. The Nifty IT index is down 30% so far this year compared to a 3% decrease in the Nifty50 index.
Following Silicon Valley Bank’s collapse and Signature Bank’s turmoil, Indian IT companies faced the heat after the banking crisis in the US and Europe erupted in March.
Despite the banking sector crisis, Indian IT companies like TCS, Infosys, and Wipro have also neared their 52-week low. BFSI clients are among the most significant customers of Indian IT companies.
The IT sector has already seen a hit to stock prices, and further outperformance of the sector looks limited until global macro headwinds subside. Given that the sector’s valuation is dependent on growth rates, any slowing of those rates could mean that it fails to even match the broader market’s performance. That said, Hota has recommended staggered buying for long-term investors in TCS of the large caps and Persistent Systems from mid-cap stocks.
Tata Consultancy Services (TCS), Infosys, and HCL Technologies all posted lower-than-expected growth in the March quarter, underlining the ongoing slowdown.
As a result of the March 2023 banking crisis in regional and European banks, caution has been increased and the June 2023 quarter could be affected. A report by Kotak Institutional Equities predicts weak US performance across companies expected to report in the near future, according to the report.
A JP Morgan analyst has also highlighted weakness in the banking, financial services and insurance (BFSI) and telecom verticals, which would impact Tech Mahindra and Mphasis, which have a high exposure to these sectors.
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