IT stocks fall even as rupee weakens amid bleak outlook, margin pressure

Indian IT stocks fell even as the rupee hit an all-time low as larger concerns weighed on them.

All the top IT stocks ended lower on Tuesday. Infosys dropped 1.1 percent, Tata Consultancy Services lost 0.2 percent, HCL Technologies lost 0.3 percent and Wipro declined 1.14 percent on the National Stock Exchange on May 10. The Nifty IT index fell 1 percent.

The Nifty IT index has slipped 3% in May so far.  Infosys, Tata Consultancy Services, Wipro, and HCL Tech have lost 7-19 percent in this period.

So far this year, the Nifty IT Index has fallen 21 percent, while the rupee has declined about 4 percent. Infosys, TCS, Wipro, and HCL Tech lost between 7 and 33 percent this year.

Technology investors typically cheer a weakening rupee, which increases earnings when dollar revenue is converted into the local currency. Every 1 percent depreciation in the rupee boosts the margins of IT companies by 14-40 basis points, analysts said.

In the March quarter, dollar revenue at TCS grew 14.3 percent in constant currency terms from a year earlier to $6.7 billion, while that of Infosys increased 20.6 percent to $4.3 billion. Wipro’s dollar revenue grew 3.1 percent sequentially to $2.72 billion.

According to ICRA, TCS, Wipro, HCL, Tech Mahindra and Infosys reported a good performance in the fourth quarter of FY22. There has been some moderation in operating margins over the past few quarters, driven by wage cost inflation on the back of demand-supply gaps and high attrition levels, and also due to normalisation of operational overheads with the resumption of work-from-office to a large extent. However, overall profitability and accrual generation has remained healthy.

“Global macroeconomic factors including uncertainty related to the ongoing geopolitical issues between Russia and Ukraine are likely to have some impact on IT services companies with considerable presence in Eastern Europe,” said Deepak Jotwani, assistant vice president & sector head - corporate ratings at ICRA.

“However, the overall impact on the industry performance is not expected to be significant. While there could be slight deferrals in contract awards/IT investments in select geographies, overall technology spend is likely to remain healthy across key geographies.”

Analysts expect Indian IT service companies to report steady growth of 10-12 percent over FY23 and FY24, supported by accelerated demand for digitisation globally. However margin pressure is likely to sustain over the near term, although abated to some extent by increasing operational efficiencies.

Volatility in the global markets amid higher inflation and expectations of tightening by central banks along with the Russia-Ukraine war, which is unlikely to end soon, may see a slowdown in order books. Most Indian IT companies are moving their operations out of Russia while helping clients maintain business continuity by shifting work to other locations. This is likely to increase margin pressures further, analysts said.

“Monetary tightening by the Reserve Bank of India or the US Federal Reserve will have a negative effect on IT services top line and margins only if it results in a sharp slowdown in economic activity or a recession,” said Deepak Jasani, head of retail research at HDFC Securities. “IT projects cannot be postponed by businesses if they want to maintain their edge against competitors. However, in times of a sharp slowdown or recession, businesses across the board could postpone such spends.”

According to Ajit Mishra, VP of research at Religare Broking, broadly, the IT results in the March quarter were mixed – the order pipeline stood strong while margins were a bit impacted due to high attrition and employee costs. Besides, a sharp fall in global IT majors adds to the pressure. However, Religare’s long-term view on the IT sector is still positive, given the strong order pipeline and continuous demand for cloud and digitalisation across verticals.