Its the worst year for India's top tech stocks since the global financial crisis. After two consecutive years of gaining over 50 percent, the IT index is down nearly 30 percent this year. In fact, 2022 will also be the first time in six years when it may deliver negative annual returns.
The US is currently grappling with inflation that is at the highest in four decades, prompting the Federal Reserve to preside over four consecutive rate hikes with more in the pipeline. The latest US inflation data meant chances of a 50 basis points rate hike are completely off the table, while there is now a 10 percent chance for the Fed to hike rates by 100 basis points.
More than 50-80 percent of the total revenue of Indian IT companies comes from the US.
Brokerage firms like Nomura and Goldman Sachs have a cautious stance on the sector, with the latter even downgrading most of the IT majors, Macquarie thinks otherwise, stating that the fears are overdone.
Let's take a look at what they had to say:
Nomura sees more evidence of revenue slowdown
Broking firm Nomura downgraded India's IT sector in May, stating that investors must brace for a slowdown. The rationale behind the downgrade was prospects of disappointing margins and revenue growth in FY23 and FY24.
"June quarter of FY23 did show glimpses of margin disappointment. We see more evidence building up for revenue growth slowdown in CY23/FY24F for the sector," Nomura's Abhishek Bhandari & Krish Beriwal wrote in their note.
Nomura's interaction with industry participants suggests that high inflation and a macro slowdown in developed markets will impact the tech budget for most industries. In addition, large-cap IT has had limited margin gains from the weakening rupee as other currencies like the euro and pound have weakened more than the US dollar.
The brokerage has retained its cautious stance on the sector. "We believe that investors are likely to get disappointed on margins in FY23F and on growth in FY24F," the note said. It prefers large-cap names over mid-caps in the current environment.
Goldman Sachs says valuations still high
TCS, Infosys and Tech Mahindra have been downgraded by Goldman Sachs after the brokerage believes valuations remain high despite the correction and are not factoring in the downcycle ahead.
The firm believes that the US dollar revenue growth of Indian IT companies will start to "materially slow down" from here.
Goldman Sachs has cut the US dollar revenue growth forecast for the top five IT companies by 4 percentage points to 6 percent year-on-year, from their earlier forecast of 10 percent growth in FY24E.
The only stock that Goldman Sachs has upgraded is Wipro, mainly on attractive valuations.
Macquarie says fears overdone
Contrary to the comments made by Nomura and Goldman Sachs, brokerage firm Macquarie is optimistic about the Indian IT sector. In fact, its Asia unit has revised its cloud capex guidance higher.
The firm believes that the forecast for Indian IT companies, particularly TCS, is very bearish. It expects 8.3 percent US dollar revenue growth in FY24 and a similar quantum in FY25. "Corporates with strong balance sheets will continue to spend," Macquarie's Ravi Menon told CNBC TV-18 in an interview.
Macquarie expects attrition to normalise in the third quarter as the current quarter still has cross-currency headwinds and wage hikes that companies like Wipro have to deal with. The firm also expects attrition rates to moderate in the December quarter.
The Nifty IT index currently trades 3.3 percent lower and is the worst-performing sectoral index.
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First Published: Sept 14, 2022 11:23 AM IST
Check out our in-depth Market Coverage, Business News & get real-time Stock Market Updates on CNBC-TV18. Also, Watch our channels CNBC-TV18, CNBC Awaaz and CNBC Bajar Live on-the-go!
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