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Worries over likely global slowdown weigh on IT companies

IT sector stocks extended their losses on Friday, with the S&P BSE Information Technology index correcting 5.72% since its highs on 1 December, prompting analysts to warn that a potential slowdown in business on global recession fears is leading to the correction.

The fears were accentuated by HCL Technologies expecting growth to be at lower end of its guidance. Rising interest rates are already weighing on sentiments as the impact on rate-sensitive sectors like mortgage, capital markets in the BFSI (Banking and Financial Services) vertical, discretionary retail, and pockets of manufacturing verticals can impact Indian IT companies. Furloughs are also likely to weigh on growth for the sector in Q3FY23, said analysts at Nomura Research.

The IT sector has already underperformed the broader indices during 2022. The BSE IT Index is down more than 22% compared with 6.7% gains in the sensex. The earnings downgrades starting post December quarter performance have weighed on sentiments. While earnings downgrades have been in the range of 4–5% only, it is the correction in valuation multiples that has led to steep corrections in stock prices and IT index, said analyst Amit Chandra at HDFC Securities.

Some more downgrades are possible post Q3; however most concerns may now be getting factored in, said Chandra. The growth rate expectations have normalized to pre-covid levels. Supply side issues, cost pressures, attrition, etc. already have peaked and cross-currency headwinds may not accentuate from here on. So, there is some possibility of companies being able to surprise on the margin front moving forward, said Chandra. Easing operational challenges and margin recovery had remained a key highlight in the September quarter that helped improve investor sentiments more than revenue growth.

“Major US IT companies felt the burn of macroeconomic headwinds and prepared by trimming their employee strength through massive layoffs to improve margins. However, revenues of major Indian IT companies in Q2FY23 were consistent with the estimates with healthy outlook commentary,” said Vinod Nair, head of research at Geojit Financial Services.

Despite the macroeconomic headwinds in the global markets, most revenue was supported by cloud, engineering, and digital services. Going forward, healthy deals in the areas are estimated to drive growth, added Nair.

Not surprising the BSE IT index had rebounded more than 11% from September lows till the start of December, before giving up some gains. The rebound from lows was also aided by foreign portfolio investors (FPI), who bought about $447 million worth of software and services stocks during November.

Analysts remain cautiously positive on certain pockets based on geographical exposure and valuations.

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