The macroeconomic headwinds for the Indian information technology sector are gathering pace on the back of emerging signs of a slowdown in the US and European Union economies – two of the biggest markets for the rest of the world.
The quarter ended June saw several IT companies miss the Street expectations for their earnings, while a tangible slowdown in hiring momentum pointed to managements preparing for some slowdown in deal wins going ahead.
That said, the concerns for investors appear to be more prominent for large-cap IT companies like Tata Consultancy Services, Infosys, Wipro, Tech Mahindra and HCL Technologies.
While the big five technology companies were able to meet or better analysts’ expectations for their topline in the June quarter, they missed the estimates for their bottomline reflecting the impact of weak profitability in the quarter.
Earnings estimate for the five major IT firms for 2022-23 and 2023-24 have taken a sharper downgrade when compared to their rivals from the mid-cap space.
Consensus earnings estimate for large-cap IT companies have been cut by 3-8 percent for the current financial year and 2-7 percent for the next financial year following the June quarter earnings season.
Midcap IT companies, however, have suffered only up to 4 percent downgrade in their earnings estimate for 2022-23 and up to 3 percent for 2023-24. The slightly lesser downgrade reflects the optimism of the mid-cap IT services companies vis-à-vis their larger peers.
“Coming to our FY23 outlook, given the rising macro uncertainties we've taken a closer look at the outlook and we feel confident that the demand trends and tailwinds with current order book give us the visibility to continue to drive growth,” said Mphasis in its post-earnings earnings call.
On the contrary, large-cap IT firms such as TCS and Infosys seemed guarded in their outlook for the future. While they showed confidence in the growth momentum likely persisting through 2022, the view on 2023 appeared hazier.
“We of course recognise what is going on in the global environment. And we mentioned a couple of areas, our share within financial services, mortgages. So we see pockets where we see some impact,” Infosys told analysts in its post-earnings call last month.
On the profitability front, too, brokerage firm Nomura India sees a better outlook for mid-cap companies owing to their lower exposure to the European market.
“Mid-caps have slightly better margin outlook for FY23, given their lower European exposure which is a good news, both from revenue headwind and margin benefit perspective as they capture higher benefits from rupee’s depreciation against US Dollar,” Nomura India said in a note.
Going ahead, it is likely that growth-savvy investors may shift attention towards selective companies in the mid-cap and small-cap IT space to generate outperformance as large-cap IT stocks struggle to gain traction amid continued concerns over growth, margins and selling by foreign investors. Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
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