Infosys, TCS poor show in Q4 weighs on IT stocks, BSE IT index declines over 5%

Investors are also dumping IT stocks globally as, analysts say, anticipating aggressive rate hikes by the Federal Reserve to combat a multi-year-high inflation in the US. "Rise in interest rates would slow down several economies where IT companies operate and hence expect to see some impact on their business performance," said  Vishnu Kapadia, Chief Investment Officer at MJK Investments.

"Equity valuations are inversely proportional to interest rates and hence it is going to be an interesting period ahead given how not just the US Fed but central banks across the world are going on a tightening cycle given the twin problems of out-of-control inflation and supply shocks."

TCS and Infosys reported lower-than-expected earnings with weaker margins. TCS margins stood at 25 percent flat on-quarter and down 189 basis points on-year due to price hikes amid high attrition.

Brokerage firm Reliance Securities expects FY23 margins to get impacted because of higher selling, general and administrative expenses (higher attrition and resumption of offices) and accelerated hiring over the next two quarters. "Favourable currency and better pricing, along with scale would nullify the impact. We forecast the margin to remain in the range of 25.1-26 percent over FY23-FY24," it said.

Infosys margin was down 193 basis points QoQ at 21.6 percent. It was because of higher-than-expected pass-through costs (90bps margin hit), higher employee costs (30bps margin hit), and rise in travel costs (30bps margin hit). The company's management highlighted that while the quarterly annualised attrition was down 5 percentage points in the fourth quarter, wage hikes in FY23 could be competitive and higher than last year particularly overseas.

Jefferies India cut the Infosys margin estimates by 100-170 basis points to factor the miss and expected 21.9 percent margin in FY22. The brokerage firm Nomura Research expects FY23 EBIT margin to drop 100 basis points year-on-year to 22 percent and lower FY22-24 earnings per share by 5-7 percent primarily on our lower margin expectations. B&K Securities assume margins of 22.7/23.7 percent for FY23/24 and hence downgraded the EPS estimates by 5 percent each year to Rs. 63/78 per share respectively.

"The downfall in IT stocks is triggered by the weak Infosys Q4 results. It has prompted industry-wide concerns like high attrition, wage inflation, lower utilisation, and cut-down of IT spending by industries due to geopolitical and macroeconomic issues. The sharp correction was triggered because the industry was trading at premium valuations and concerns over downgrade in future earnings growth," said Sethumadhavan KS, Research Analyst at Geojit Financial Services.