India’s IT sector likely to face macro headwinds until end 2023, say analysts
According to analysts, India’s information technology (IT) services companies are facing challenges due to concerns of an economic recession in developed markets and the effects of a banking crisis in the US and Europe. The situation is not expected to improve until the end of the year. As a result, foreign portfolio investors (FPIs) have sold their stakes in IT companies, contributing to the sector’s weakness. In March, FPIs became pessimistic about the IT and oil and gas sectors and sold equities worth ₹13,734 crore between the two sectors.
Due to macroeconomic challenges such as high inflation, interest rates, and a banking crisis in the US and Europe, analysts predict that the IT sector will face a few cautious quarters ahead. The primary concern for the IT sector is the slowdown in growth and the potential for a recession.
As long as the global growth remains uncertain and the slowdown persists, IT companies may experience lower order flow, slower execution, and pricing challenges. These factors could result in a decline in IT companies’ valuations. According to Deepak Jasani, the head of retail research at HDFC Securities, investors will need to remain vigilant for the next one to two quarters until there is more clarity on the global growth outlook.
The fourth-quarter results and FY24 growth projections of major IT companies reveal the sector’s ongoing challenges. Infosys reported a constant currency growth rate of 15.4% for FY23, which was lower than the guidance of 16-16.5% that it had given at the end of Q3. Additionally, it predicted a revenue growth rate of 4-7% for FY24. This is the first time since FY16 that Infosys has projected single-digit revenue growth in constant currency terms. Similarly, Tata Consultancy Services (TCS), a larger competitor, had a low constant currency revenue growth rate of $7.2 billion in Q4, the lowest in 11 quarters.
Tata Consultancy Services’ CEO, Rajesh Gopinathan, has stated that the company is experiencing stress in one of its largest markets, North America, and the anticipated recovery has not yet materialized. According to Sanjeev Hota, the Head of Research at Sharekhan BNP Paribas, the IT sector’s macroeconomic uncertainty is unlikely to improve for another 2-3 quarters. The industry may see some stability towards the end of this year. North America and the US, which are significant markets for the IT sector, are not expected to improve in the near future.
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