The underperformance of Indian IT equities has resulted in large share price declines for Tata Consultancy Services (TCS) and Infosys this year. Analysts predict further pain for the industry and a likely halt in dollar revenue growth in the face of looming macroeconomic pressures. One of the most affected industries this year has been the IT index, which has fallen nearly 27% and underperformed the benchmark Nifty 50 index.
The shares of top IT giant TCS are currently trading close to its July record low of ₹2,973 rupees per share on the BSE. The IT stock has had a year-to-date decline of more than 20%. TCS reported a 5% increase in quarterly profit for the quarter ended June 2022 (Q1 FY23), below analysts’ estimates as growing staff expenses impacted profitability even while demand remained strong.
On the BSE, Infosys shares fell to a 52-week low of ₹1,360 in early trade on Thursday. The second-largest provider of IT services announced a lower-than-anticipated 3% increase in net profit for the June quarter as operating margin decreased due to increased expenditures. The company’s shares has dropped around 27% so far this year.
The rating of TCS and Infosys was downgraded to sell from buy last week by the international brokerage and research firm Goldman Sachs, which noted that it was still more optimistic about the EBIT margin forecasts than the revenue projections for the Indian IT companies given a number of factors, including higher employee utilisation, restrictions on variable pay, and annual wage increases.
“Given the impending macro slowdown (not recession) that our macro team anticipates and that is permeating down several leading demand indicators, we believe that the Indian IT sector’s USD revenue growth will start to materially slow down from here, weighing on the above-mentioned secular tailwinds. Therefore, we reduced our average year-over-year (yoy) revenue growth prediction for the top 5 firms for FY24E by 4 percentage points from 10% to 6% “said the note.
Top IT service providers in India have begun suspending or reducing staff incentives out of concern that shrinking budgets at clients in the US and Europe who are preparing for a recession will severely hurt their own profit as the pandemic-driven boom fades.