Why IT Stock Investors Stay Tuned

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Indian tech giant Infosys Ltd has dismissed concerns of a slowdown and is optimistic about the outlook for demand. At its recent analyst day, management said that despite global macro challenges, its customers continue to spend on cloud-related services. Thus, Infosys’ FY23 constant currency revenue growth forecast of 13-15% and Ebit margin forecast of 21-23% are intact. Ebit is short for Earnings Before Interest and Taxes.

Global IT companies are also radiating confidence in maintaining demand momentum. In fact, March quarter earnings for calendar year 2022 (Q1CY22) from companies including EPAM Systems, Inc., Globant, Endava Plc and Capgemini beat consensus expectations for revenue growth, analysts said. of JM Financial Institutional Securities Ltd. to the strong revenue performance of 1QCY22, companies continue to move towards strong revenue momentum which will continue in CY22/FY23 and increase their annual outlook,” added the dated JM Financial report. from June 1.

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Upbeat vibe

But the Nifty IT index does not reflect this optimistic mood. The sector index is down about 24% so far this calendar year. It’s not just Indian investors, tech stocks have also fallen out of favor with global investors. In fact, according to the latest Global Fund Manager Survey by BofA Securities, the allocation to tech stocks fell 23 percentage points on a monthly basis in May to a net underweight of 12%. This is the largest net underweight in technology stocks since August 2006, the survey report said. Businesses are concerned that companies are cutting back on IT spending amid global economic turmoil and interest rate hikes by central banks. This will impact the industry’s contracts and pipelines for FY24, especially in developed economies.

“Given the strong correlation between US GDP growth and Indian IT services revenue, fears of a recession or slowdown induced by Fed rate hikes are a major headwind for IT stocks,” Kumar said. Rakesh, senior automotive and technology analyst at BNP Paribas Securities India. .

So despite a strong demand outlook, investors will be watching macro headwinds closely, he said.

In addition, near-term margin compression is almost a given due to a challenging supply-side environment, high attrition and returning travel costs. Indian IT companies are seeing attrition easing only gradually.

“When it comes to the near-term margin outlook, there are more headwinds than tailwinds. We expect margin compression of around 160 basis points for the IT stocks under our coverage in the quarter of June Given the macroeconomic uncertainties, we expect two quarters of pain for the IT sector,” said Omkar Tanksale, analyst at Axis Securities Ltd. One basis point equals 0.01%.

He said attrition could remain high in the short term. Given that salary costs account for 60-65% of expenses, salary increases and retention bonuses would weigh on Ebit margins for the time being.

Certainly, with the increase in fresher hires, the employee pyramid of IT companies will improve, which is considered to be one of the medium and long-term margin levers.

Meanwhile, after the recent rout, Indian equity valuations have deteriorated. If the global growth narrative weakens or inflation does not ease, valuations and earnings estimates will be at risk.

“IT stock valuations, particularly mid-caps, have corrected 30-50% from their highs, reflecting inflationary concerns over growth stocks. That said, consensus EPS estimates (for FY24 ) for Indian IT services companies fell another 1-6%,” Kumar added.EPS is short for earnings per share.

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