Nifty IT tumbles as EPAM Systems sends out SOS; midcap stocks hit hardest

EPAM reduced its current quarter revenue outlook to a range of $1.16 billion to $1.17 billion, and earnings per share (EPS) of between $2.33 and $2.40.

The Nifty IT was the biggest sectoral loser of the day on June 6, falling over 2 percent, taking traders for a surprise. The selling has come amid weakening demand for IT companies and a consequential guidance cut by EPAM Systems.

EPAM reduced its current quarter revenue outlook to a range of $1.16 billion to $1.17 billion, and earnings per share (EPS) of between $2.33 and $2.40. It had previously guided for revenue of $1.195 billion to $1.205 billion and EPS of $2.38 to $2.46.

Nifty IT index traded down 2.37 percent to 28,546. Selling was seen across the board. Midcap IT names were relatively more affected with Persistent Systems and Mphasis falling over 4 percent each. Coforge, Tech Mahindra and L&T Tech Services were other big losers.

EPAM Systems is an American IT services company. It has cut guidance midway through the second quarter (June quarter).

"In the weeks since our Q1 earnings call, we have seen our clients become even more cautious with spending specifically in the 'build' segment of the global IT services market. After careful assessment of changes in our May and June forecast data, we have come to understand that pipeline conversions are occurring at slower rates than previously assumed and we are also seeing some reduction in the total pipeline,” said Arkadiy Dobkin, CEO and President, EPAM.

This hit sentiment back home hard.

Analysts at Kotak Institutional Equities said Indian IT companies are not immune to demand slowdown. Delays in client decision-making and pullbacks in discretionary spending have implications for the growth of Indian IT.

“We expect revenues in Q1FY24 to be weaker than 4QFY23 across companies in our coverage universe. We believe that the demand environment is especially weak in the financial services and technology segments,” they said in a note on June 6.

A prolonged recovery in clients’ willingness to spend would imply downside risks to FY2024 revenue growth estimates. Noting the weak demand, we are surprised by the rally in stock prices across our coverage in the past month. We believe that upsides do exist in Infosys and HCLT but are wary of other names.

The analysts acknowledged that the impact on EPAM has been amplified by its high exposure to discretionary spending and certain company-specific factors. On the other hand, Indian IT companies have a more balanced portfolio between discretionary and maintenance spending.

“However, these positives are outweighed by the broader caution in spending, especially in the impacted verticals,” the analysts added.

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