Estimates don't factor EPS risk from slowdown in spending for IT companies: JPMorgan
According to JPMorgan the current estimates do not factor in the increased EPS risk from a further slowdown in spending. Kotak says the current growth forecast is for an 8 percent growth, but that could be impacted by 1 to 2 percent given what we are seeing globally.
The IT Index has been one of the worst-performing indices this week. The index was down more than three percent and it has taken the brunt of the global bank exposure and the turmoil in the banking space.
Bear case
Street is worried about the direct exposure of IT companies to some of the impacted banks, whether it's Credit Suisse or Silicon Valley Bank (SVB). But even with the indirect impact, banks globally, in the US or in the EU may turn cautious, they could look to cut back on their spending, and there could be a delay in decision-making. All this is likely to hurt the growth rates of Indian IT companies and the outlook is very uncertain.
According to JPMorgan, the current estimates do not factor in the increased EPS risk from a further slowdown in spending.
Kotak says the current growth forecast is for an eight percent growth, but that could be impacted by one to two percent given what we are seeing globally.
Read Here | Is there a risk of layoffs in Indian IT after massive job cuts at Accenture, Meta and Amazon?
CLSA has flagged two scenarios. One, if the crisis is short-lived and contained, in that event, an EPS impact of two to three percent for some of the large companies is expected. But if the crisis is prolonged, it's larger in scale, then the EPS impact could be as much as seven to eight percent.
According to Ambit, there is a risk that the overall impact on BFSI could be longer term and in that case, it's not just FY24 EPS but even FY25 EPS that could be at risk.
So basically, on the bearish side, there is a lot of uncertainty right now, whether the hit on the growth is going to be one quarter, two quarters or it's going to be more prolonged. Remember BFSI is the largest contributor to Indian IT companies.
Bull case
With the correction in the IT names, valuations are actually closer to their five-year average valuation. TCS's current valuation is at 24 times but the five-year average valuation is just 25 times. For Infosys, current valuation is at 21 times, sharp drop off from the peak levels of 28 times and closer to the five-year average of 20 times and it is a similar picture for Wipro as well as HCL Tech.
For Wipro, the current valuation is 16 times closer to the five-year average of 15x and for HCL Tech as well current valuations at 18x closer to the five-year average. So that's point number one — valuations are closer to their five-year average valuation multiples.
The second bullish argument is that margins have already bottomed out. They are on their way to recovery and the recovery is only going to gather strength. The reason for that is attrition is coming down sharply, wage hikes in FY24 are going to be far more moderate given the layoffs that we are seeing and companies are looking to improve their utilisation. Utilisation has some headroom and sub-contracting costs are likely to come down.
The third argument is that Indian IT has corrected far more than the Nifty the benchmark index from the peak level the Nifty IT index is down 24 percent while the Nifty is down 10 percent and the Nifty IT index is actually closer to its 52-week low just about seven percent away.
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