Informist, Tuesday, Jul 5, 2022
By Vivek Kumar
MUMBAI – Investors will be watching out for signs of a fall in demand and a slowdown in hiring when India's premier information technology companies outline their Apr-Jun performance, starting later this week.
A visible slowdown in the global economy, with the risk of recession in the US, has been giving sleepless nights to investors in Indian IT companies.
They fear that moderation in economic activity in the core markets of the US and Europe will spur clients of these companies to cut IT budgets, affecting the demand for such services.
Over the last month, some major retail companies in the US have warned of a hit to their profit due to a surge in inflation. With the retail and consumer goods segment being one of the top contributors to Indian IT companies' revenue, a less-than-rosy growth outlook for this particular vertical is expected to affect IT companies' overall growth prospects.
Prompted by such concerns, investors have been dumping IT stocks for the past three months. The Nifty IT index has been one of the worst performers during the period, having lost more than 23% against the 10% decline in the benchmark Nifty 50.
A relatively higher concentration of foreign investor interest in topline IT firms such as Infosys Ltd and Tata Consultancy Services Ltd also added to the ferocity of the correction as foreign investors have been on the retreat from the Indian market for nine months.
However, these macroeconomic headwinds are not seen as having had much of an impact on IT companies' earnings in Apr-Jun, particularly given the strong deal wins in the past two years. They are likely to have a more pronounced impact in the second half of this financial year.
Brokerage firm Jefferies expects the revenue of Indian IT companies to have grown 2.2-5.3% sequentially in constant currency terms. Analysts expect Infosys and HCL Technologies Ltd to lead the growth charts, partly due to the soft base. Seasonality factors are likely to hurt Tech Mahindra Ltd and Wipro Ltd's topline growth.
At the same time, analysts do not see Infosys, HCL Technologies and other companies tweaking their 2022-23 (Apr-Mar) revenue growth guidance just yet, given that it is just the first quarter.
"While management commentary will be keenly watched, given the macro concerns, positive commentary might be overlooked by the market," Jefferies said.
Another factor that will be in focus this time around will be cross-currency headwinds. Amid changing macroeconomic conditions and aggressive rate hikes by the US Federal Reserve, the dollar has appreciated 5-10% against the euro, pound sterling and Japanese yen.
This could negatively impact dollar revenue growth for the IT companies by 20-140 basis points in Apr-Jun, as per analysts.
MARGIN PRESSURES
With attrition expected to remain at elevated levels, and higher travel and visa costs, margin pressure is likely to persist for IT companies in June quarter.
The operating margins of the companies may have contracted by 30-300 basis points sequentially during the last quarter, according to analysts.
"Attrition should remain at elevated levels and supply will continue to stay constrained, leading to elevated replacement costs. Moreover, a higher intake of freshers will result in lower employee utilisation, which will further constrain profitability," said Motilal Oswal Financial Services.
Analysts believe the attrition rate will inch higher for a couple of quarters before peaking, and even the recent management commentaries indicated the same.
THE BOTTOMLINE
While attrition and margin pressure may ease going ahead, demand could moderate, and this hints toward earnings growth concerns for IT companies.
The margin pressure will peak by Jul-Sep and may gradually improve from the second half of this financial year, but revenue momentum is expected to start softening from the same time on account of clients postponing spending on technology, said ICICI Securities.
While the longer-term prospects for the sector remain buoyant, it is not immune to the deteriorating macroeconomic conditions currently at play. End
US$1 = 79.37 rupees
Edited by Shirsha Thakur
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