IT SECTOR

1. Context

On Thursday, India’s tech blue chip Infosys reported a 13.4 percent rise in its consolidated net profit for the quarter ending December 2022.

2. Key Points

• Earlier this week, the largest IT company in the country, Tata Consultancy Services Ltd (TCS), posted an 11.02 percent growth in profit for the quarter.
• Tech companies, thus, appear to be withstanding the vagaries of the economic slowdown, which has been triggered by high inflation, high-interest rates, and falling growth rates across the globe.
• Infosys’s operating margins in the third quarter remained resilient due to the cost optimization benefits that have offset the impact of seasonal weakness in operating parameters.
• Attrition also reduced meaningfully during this quarter and is expected to decline further in the near term, which is a positive development for the company.
• While the global economy was hit by high inflation and interest rates, tech companies maintained their growth tempo in overseas markets too.
• Among major markets, North America and the UK led with 15.4 percent growth, while Continental Europe grew 9.7 percent.
• In emerging markets, Latin America grew 14.6 percent, India grew 9.1 percent, Asia Pacific grew 9.5 percent and Middle East & Africa grew 8.6 percent, according to TCS.

3. The outlook for the IT sector

• Globally, experts anticipate greater uncertainty in consumer technology as Covid-19 tailwinds continue to abate, energy prices rise in Europe and global economic activity slows.
•  Areas such as consumer IT hardware, gaming, e-commerce, and digital advertising may have a slightly longer road to recovery.
• They expect consumer discretionary spending to weaken as unemployment rises and as excess household savings that had built up during the pandemic decline amid persistently high inflation.
• This began to play out during the second half of 2022, which led to negative estimate revisions across the semiconductor, consumer personal computer (PC), gaming, and internet industries.

 4. Fitch Ratings

• Fitch Ratings said the Indian IT sector outlook for 2023 is stable. “We expect Indian IT services companies’ revenue growth to slightly exceed global competitors’ in 2023 and 2024, as customers will most likely prefer lower-cost IT vendors amid an economic downturn.
• In the global financial crisis of 2007-2010, Indian IT companies’ US dollar-denominated revenue expanded at a CAGR of 16 percent outperforming global peers such as Accenture plc, Capgemini SE, and Atos SE, which all reported flat to declining revenue,”

5. The shadow over the IT sector

• Two factors that are likely to cast a shadow over the sector are high inflation and a sharp increase in interest rates over the last four quarters.
• This has forced companies to reduce their IT budgets amid talks of recession.
• While high inflation and rising interest rates are increasing the cost of capital for companies, they are also eating into the disposable incomes of individuals and forcing them to reduce their spending amid a weak macroeconomic outlook.
• This is directly impacting the outlook for technology companies whether it is about their products, services, or ad revenues, and is thereby impacting their share prices.
• As for Indian IT majors, an adverse macroeconomic situation in the US and Europe will keep the order flows, business growth, revenue, and share prices dampened.

6. Tech firms faring on the stock market

• The valuation still looks attractive compared to historical averages and we believe
• that limited downside risks are going forward.
• The stock market performance also clearly reflects the concerns that the markets have regarding IT companies, over slowdown concerns in the US and Europe, and its impact on Indian IT firms.
• In the period between April 1, 2022, and January 12, 2023, while the benchmark Sensex at BSE has risen 1.14 percent, the IT index at BSE is down 21.28 percent.
• Leading IT companies TCS (-18 percent), Infosys (-24 percent), and HCL Technologies (-21 percent) are already down from their 52-week high levels.
• There has been a sharp decline in holdings of IT companies by mutual fund and foreign portfolio investors.
• However, IT companies like TCS and Infosys have also announced buybacks at good prices for the shareholders.
• IT and technology companies witnessed a sharp surge in valuations during Covid times as everything was turning digital and there was optimism around their Amid growing concerns about an economic slowdown, even shares of top US tech companies are yet to reach that high again.
• If the US tech giants are struggling, it is unlikely that the Indian IT sector, which is largely dependent upon business and revenue from the US and other developing economies, will go unscathed.

• So, it would not be a bad idea to invest in them on dips in leading IT majors, for the medium to long term.

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