After two years of pandemic-induced demand and multi-year digital transformation deals, Indian IT sector appears to be entering a growth slump phase due to the macro economic challenges, inflation and an impending recession in the US market, which accounts for majority of the Indian IT sales.
The cracks were first pointed out by HCLTech on December 8 during its investor day, when CEO C Vijayakumar indicated that the revenue is likely to come in the lower ends of its revenue guidance band of 13.5-14.5 percent in CC (constant currency) terms due to furloughs being greater than expected and challenges in the BFSI and Hi-tech segment. The company indicated slowdown in discretionary spending in the tech, telecom and other verticals. Post Q2FY23 earnings, the company had increase revenue guidance band to 13.5-14.5 percent for overall FY23 from previous 12-14 percent in CC terms.
HCLTech's stock price corrected by over 6.3 percent since the investor day meeting.
Brokerage firm Credit Suisse, meanwhile, has downgraded the overall Indian IT sector, expecting a correction of 10-27 percent in market valuation, wherein HCLTech will be the worst hit. This comes on the back of an expected higher risk to revenue in the financial year 2024 in case the US economic situation worsens. The US market roughly accounts for 45-60 percent of the Indian IT sector revenue.
According to Credit Suisse, HCLTech may be at a risk of seeing over 20 percent correction in stock market valuation. Infosys and Wipro stand to see up to 15 percent possible correction, TCS might have an 8 percent risk of valuation correction.
The brokerage firm, however, has an outperforming rating for Infosys, even as it continues to remain neutral for TCS and HCLTech, and gives an underperforming rating to Wipro.
Infosys is witnessing more deals coming in the cost optimisation and efficiency improvement side with longer tenure. That’s why valuation of these deals too are higher compared to normal short-term execution digital deals, according to a report by Nirmal Bang.
Seasonality in revenue growth will be in line with the pre-pandemic trends.
December quarter weaker than expected
“We do expect this to be an industry-wide problem and not an HCL Tech specific one. While there was no discussion on specific numbers by either Infosys or Cognizant, we get the sense that December 2022 and possibly March 2023 are likely going to be growth challenged quarters for the industry; may be a bit more than earlier anticipated,” Girish Pai, head of research, Nirmal Bang said in his report.
Pai noted that the HCL Tech management commentary highlighted another problem expected in FY24 – pricing. “It hinted that price increases are more selective now than they were 6-9 months back.”
As per analysts at Morgan Stanley, though HCLTech’s “near-term update on the macro impact on demand/revenue was negative, but commentary on margins was comforting.”
“Management sounded confident on delivering a good order book for Dec-2022 quarter. On the margins front it maintained its guidance of 18- 19 percent, with near-term aspiration of returning to the 19-20 percent range,” the analysts noted.
For the overall IT sector, experts maintained that it will be difficult to get visibility on 2023 spending as budgeting delays in client spending is expected.
“We also believe that instead of a typical budget flush (because of a spend-it-or-lose-it condition), there is likely under-spending of budgets that could affect Dec’22 quarter revenue. We are also not sure whether the IT industry will have great visibility about spending in 2023 as we expect budgeting to be delayed and/or short-term oriented (quarter by quarter), with the possibility of divergence between spending vs budget if economic conditions and P&L/balance sheet conditions deteriorate,” Pai said.
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