TCS, Infosys, Wipro and other IT companies' dream run could be over, say analysts

TCS, Infosys, Wipro and other IT companies' dream run could be over, say analysts
  • Valuable Indian information technology stocks have tumbled heavily in the last one month, falling up to 18%.
  • While spending on digital transformation will continue from large enterprises, the overall growth rate in tech spending could decelerate as companies feel the pressure of inflation on their toplines.
  • The Nifty IT index has fallen two times more than the benchmark index Sensex and Nifty 50 in the last one month.
Indian information technology stars’ dream run in the post-pandemic era could be slowing down, with the Nifty IT index falling twice as much as the benchmark Sensex and Nifty 50 in the last one month.

Nifty IT index slipped over 13% while the benchmark indices have fallen over 6% during the one month period.

One of the reasons for the sharp fall is because of the massive selloff in the US markets, which is where most of our tech majors’ revenues come from. Currently, the IT sector is facing a challenging macro environment including rising borrowing costs, making it difficult for companies to spend more on digital transformation.

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Digital transformation spendings could see a slowdown

The biggest driver behind IT companies’ record growth in the post-pandemic era has been enterprises enrolling in digital transformation programmes, revamping their IT infrastructure and adopting new technologies.

Those days of record growth could be behind us, suggest analysts.

“We think enterprises’ willingness to spend on digital transformation will continue, but growth rates on spends are likely to decelerate constrained by revenue and earnings volatility,” said analysts at Nomura.

Recently, top US retailers Walmart and Target reported poor earnings, hinting at topline troubles in the economy.

In fact, FAANG stocks (Facebook, Apple, Amazon, Netflix, and Google) have lost more than $2 trillion in valuation since the beginning of the year.

More pain ahead
Brokerage firm Nomura Research sees a potential slowdown in terms of revenue growth for IT companies in FY24. It expects tough days ahead for tech spending amid challenging macroeconomics conditions, hawkish US Fed stance to tame inflation and profit warnings by corporates across the globe.

JP Morgan downgraded its ratings on TCS, HCL Tech, Wipro, L&T Tech to ‘underweight’ from ‘neutral’ on potential macro slowdown.

“Indian IT growth was accelerating till 3Q22 and has begun to slow down from 4Q22, which is likely to worsen into FY23 from tougher comps, supply issues and eventually a worsening macro. With peak sector growth behind, growth deceleration should continue to weigh on sector multiples,” said a report by JP Morgan.

It downgraded the IT sector stance to Underweight and target multiples by 10-20%.

“Fast changing macroeconomic conditions, hawkish Fed stance to tame inflation through continued interest rates hikes and profit warnings by corporates across the globe seem to suggest tough days are ahead for tech spending, in our view,” said analysts at Nomura.
IT companiesChange in the last one month
HCL Technologies-11.27%
Tech Mahindra-17.53%
Source: BSE as on May 25

A study by Nomura reveals that 750 out of 2,000 global companies suggest a material slowdown in the overall financial performance in the upcoming quarters.

The brokerage has downgraded some Indian IT company stocks along with target price.
IT companiesNomura rating Target price Current market price
TCSFrom Neutral to Reduce₹2,950 ₹3,165
HCL TechnologiesFrom Buy to Neutral₹1,100 ₹974
WiproFrom Buy to Neutral₹490 ₹446
Tech MahindraBuy₹1,350 ₹1,064

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