Moneycontrol Pro Panorama: Tech blues, what lies ahead?

There is optimism over the longer term because businesses will have to keep up the IT spends, given the importance of technology in today’s world

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India’s information technology (IT) sector is grabbing investor attention for all the wrong reasons. March quarter (Q4 FY23) results of the top two listed IT biggies -- Tata Consultancy Services and Infosys -- not only disappointed on all counts, but their narratives on the outlook ahead portend more gloom.

As expected, the slowdown in the US and Europe had flagged concerns around discretionary spends by clients and delayed decision making by existing clients. High salaries and big hikes, perhaps in a bid to compete with the fintech and other technology services sectors, raised costs, resulting in margin pressure.

But it’s the banking crises and fears of a contagion that have precipitated lower guidance for FY24, when compared to forecasts on the Street.

With the tech leaders’ performance crumbling, investors are punishing IT stocks like never before. The Nifty IT index is down by about 18 percent from the year-ago level, although the correction has been sharp since the two leaders announced their Q4 results earlier this month. Most IT funds, a play on India’s prized technology sector, are down by an equal, if not greater magnitude.

So, what lies ahead? Would there be prolonged pain given the uncertain macro environment in the sector's key markets -- the developed economies? Part of the slack in revenues for IT today is also due to unwinding of excesses built during the pandemic years, says Subir Roy in this article here.

Some research houses concede that the banking, financial services and insurance vertical for IT companies could slow down significantly in the near-to-medium term. This will lead to near-term pain in order flows. On the margin front, gains may be restricted, given the large size of these organisations where costs tend to be sticky, in spite of efficiency measures being streamlined. For sustained improvement, companies would have to improve pricing, a tough measure in this milieu.

Yet, there is optimism over the longer term because businesses will have to keep up the IT spends, given the importance of technology in today’s world. Core modernisation and digitisation plans of companies would pick up after a hiatus. Perhaps, Indian technology firms would soon adapt to the new exciting world of big data, artificial intelligence and internet of things in the next phase of growth.

Be that as it may, the transition is not going to be easy and quick. Investors may have to deal with some more pain, by way of more correction as more results unfold to tell the story of transient pain in the sector. Brace for a time correction in IT stocks and a lacklustre period that would be in stark contrast to the past two years, when the sector ruled the roost during the pandemic.

Investing insights from our research team

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ICICI Lombard – Health insurance is a new growth driver as motor insurance drags

Triveni Engineering & Industries: Preparing for the next growth phase

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Why the WTO ruling on ICT tariff matters

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Martin Wolf: The future of interest rates is a riddle (republished from the FT)

India must drive global efforts for a green hydrogen economy during its G20 presidency

Newly anointed national party AAP may well have peaked with its USPs losing steam rapidly

Online gaming: New rules to promote responsible behaviour but some ambiguity remains

China’s recovery so far: Trying hard, can do better

Chips: Now shortages are hitting the machines that make them

Climate Change: Sustainable aviation claims don't stack up

Technical Picks: IRCTC, RVNL, IDFC First Bank, HCL Technologies and Zinc

(These are published every trading day before markets open and can be read on the app) 

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Vatsala Kamat Moneycontrol Pro