Moneycontrol
Jan 04, 2017 10:57 AM IST | Source: Moneycontrol.com

COMMENT: Here‘s why IT stocks can fall further

If 2016 was bad for IT, 2017 is likely to outdo it. There are enough telltale signs that the sector will be going through a bad patch



If 2016 was bad for IT, 2017 is likely to outdo it. There are enough telltale signs that the sector will be going through a bad patch. A sub-par performance of the companies, which logged poor single-digit earnings growth in the September quarter of 2016, prompted Nasscom to lower the industry’s prospects to 8-10 percent from 10-12 percent for the current fiscal.


At the time of lowering its guidance, the conservative software body had said that the worst was behind it. But subsequent developments in the global environment could make Nasscom eat its words.


Hiring habits of IT companies are a barometer of how solid the employment scene looks at any given time. Last year, when Infosys reportedly offered paid internships to campus hires before taking them on rolls, one has to wonder whether such offers usually made to third-year students in engineering students, were a means for the company to play it safe.


If IT companies are tentative in their approach on new hires, it indicates that they are unsure of the days ahead. Already, hiring by IT companies is now down at a decade’s low level.


In an address to their employees Wipro’s Chairman Azim Premji and Infosys CEO Vishal Sikka highlighted this uncertain future. Premji emphasised the difficult political scenario globally while Sikka warned of the fast changing dynamics in the IT industry with rapid transition towards automation, digitalisation and artificial intelligence.


Analysts, too, are predicting a slowdown on account of uncertainties as projects are getting delayed and pricing pressures are compelling companies to sacrifice margins. Forget growth, experts are now expecting that IT growth will contract in 2017 by 3 percent. An Economic Times report says that the contraction is due to automation and clients preferring to have their in-house team rather than outsourcing.


Apart from the inherent changes in the sector, political and social developments in Europe and the US are adding to anxiety levels. Brexit followed by a high decibel US election in which president-elect Donald Trump raised the pitch for local jobs has meant companies are in a wait-and-watch mode before committing their budgets.


These developments will have an effect in the December 2016 quarter results as well. Nomura in its results estimates has pointed out that they expect revenue growth of top IT companies to hit a 13 quarter low of 6.9 percent year-on-year growth. Pricing pressure will hit EBIT (earnings before interest and tax) margins which are expected to be at a historic low at 21.6 percent.

If management commentary and the growing uncertainties are taken into account, then numbers going forward can touch new lows. The BSE IT index that trades at a price to earnings of 16.5 times can go down further to align with the ground realities.

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