The Nifty IT sector has been one of the biggest losers amongst the sectorial baskets correcting almost 32%% from its high of 39,000. The Nifty IT sector is currently trading at 26,480 and is forming new lows in almost every trading session.
The main concern regarding the IT companies is regarding its largest consumer – US-based companies. With growing concern regarding recession in the US, it is unclear if these US-based clients of the IT companies will be able to keep up with the CAPEX. Also, there is an expectation that new deals and new deal sizes will not continue to be the same as before for the It sector.
Another concern is regarding their valuations. During & Post covid era saw IT stocks all over the world be the darling of investors. Specially the Indian IT sector, which rose almost 3.5 times from 11,000 to 39,000 from its lows in 2020 to its lifetime high in 2022. This provided very less valuation safety to investors.
Combining the high valuation factor along with the future growth concerns of these companies, especially from its largest consumer – The US Market has caused the IT stocks to correct massively from the highs.
IT Q1 Results
The first major company to start off the earnings season was the IT sector. And to be honest, the results spooked the markets a little and confirmed all the concerns. TCS opened the earnings season for IT and was followed by HCl tech. In its earnings, TCS reported a 185-basis point sequential decline in earnings before interest and tax margins to 23.1 percent for the quarter ended June.
A similar trend was seen in HCL Tech. the company reported a 2.11 percent growth in its consolidated profit after tax (PAT) at Rs 3,281 crore, compared to Rs 3,213 crore reported in the corresponding quarter a year ago. Sequentially, the profit declined by 8.83 percent from Rs 3,599 crore reported in the quarter ended March 2022.
Rupee Fluctuating & IT Companies
The rupee has been correcting a lot as compared to the dollar due to changes in interest rate fluctuation all over the globe. What kind of effect does it have on IT companies and do they stand to benefit or lose?
As mentioned earlier, the largest client of IT companies is based out of the US. Any increase in dollar value against the rupee is generally good for the IT companies as they can more value against the same deal, compared to any historical deal price.
Hence the IT companies also report dollar-adjusted results along with their results. The current scenario of rupee decline against the dollar is a big positive for the IT sector.
View on IT Sectors
IT sector will have and always will be the preferred sector to invest in over a long-term horizon for investors focusing to invest in India. This is due to the nature of business and its expansion into what is called the “sunrise” business. Name it, 5G technology, AI-based business, or web 3.0, It companies have access to future technologies that have the potential to drive growth and deliver performance over the long-term horizon.
Having said that, the current scenario seems to be a little less favorable for the short-term duration. This sector is expected to have a subdued movement and it may remain there till we get a little bit of clarity about how the growth cycle is going to get better in terms of IT spending for the US. Definitely, this will have some negative impact on the IT names and as we all can see; many names are quoting at a 52-week low.
We expect the IT sector to remain in a bearish to consolidatory. However, at current levels, there are there is some valuation comfort available and one can look at investing in this space over a long-term horizon in a staggered manner.
Stocks To Watch
Persistent Systems
Robust growth across the board
Persistent System Limited’s revenue is expected to grow organically by +6.8/+36% QoQ/YoY, led by healthy growth in services revenue. Growth is expected to be broad-based across verticals, led by BFSI followed by healthcare & life sciences and technology.
Strong deal wins to drive growth across geographies.
PSYS traction in the sales and deal wins continued to be robust, the large deal pipeline continued its healthy trend as well. Total TCV for Q4FY22 stood at USD 361mn (with 54% new TCV) and ACV stood at USD 261.9mn and the company expects healthy deal win momentum and strong seasonality for IP revenue to aid in FY23 performance.
Acquisition Strategy
PSYS spent USD 220mn on acquisitions (Shree Partners, SCI, DataGlove, Sureline, and Media Agility in FY22), of which USD 150mn is upfront consideration and the balance comprises deferred performance-linked earnouts. SCI and Shree Partners are working well and PSYS has large opportunities in the pipeline on account of these acquisitions.
Oracle Financial Services
Oracle Financial Services has acquired new customers across all business areas – Corporate Banking, Retail Banking, Modern Risk and Finance, and Financial Crime and Compliance Management. Simultaneously, the company has been growing business from its existing clients through targeted cross-selling and upselling.
The company has continued investments in building organic SaaS solutions that are now starting to bear fruits. Oracle Financial Services signed their largest-ever multi-year SaaS deal with a tier-1 US bank.
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