On Friday, the S&P BSE Information Technology index corrected 5 points, extending its losses.
The S&P BSE Information Technology index has corrected 5.72% from its highs on 1 December, prompting experts to warn that a probable slowdown in business due to global recession worries is driving the decline.
The anxieties were heightened by HCL Technologies’ expectation of growth at the lower end of its projection. Rising interest rates are already dragging on mood, as the impact on rate-sensitive sectors such as mortgage, capital markets in the BFSI (Banking and Financial Services) vertical, discretionary retail, and pockets of manufacturing verticals may all have an impact on Indian IT firms. Furloughs are also expected to weigh on industry growth in Q3FY23, according to Nomura Research analysts.
During 2022, the IT sector has already lagged the wider indexes. The BSE IT Index is down more than 22%, while the sensex is up 6.7%. Earnings downgrades that began following December quarter performance have hurt on confidence. While earnings downgrades have been in the region of 4-5%, it is the correction in valuation multiples that has led to strong corrections in stock prices and the IT index, according to HDFC Securities analyst Amit Chandra.
More downgrades are conceivable after the third quarter, although most issues may have been addressed, according to Chandra. Expected growth rates have returned to pre-covid levels. Supply-side concerns, cost constraints, attrition, and so on have already peaked, and cross-currency headwinds may not intensify further. As a result, corporations may be able to surprise on the margin front in the future, according to Chandra. In the September quarter, easing operational issues and margin recovery were more important than sales growth in improving investor sentiment.
“Major US IT companies felt the burn of macroeconomic headwinds and prepared by trimming their employee strength through massive layoffs to improve margins. However, revenues of major Indian IT companies in Q2FY23 were consistent with the estimates with healthy outlook commentary,” said Vinod Nair, head of research at Geojit Financial Services.
Despite global macroeconomic challenges, cloud, engineering, and digital services accounted for the majority of revenue. Healthy agreements in the regions are expected to boost development in the future, according to Nair.
Not surprisingly, the BSE IT index rose more than 11% from its September lows to the beginning of December before giving up some gains. The recovery from lows was also supported by foreign portfolio investors (FPI), who purchased around $447 million in software and services equities in November.
Analysts remain cautiously positive on certain pockets based on geographical exposure and valuations.
