Reality test for IT stocks as global slowdown issues take centre stage

Posted on by Jose K. Taing

Between January and mid-February this 12 months, the Nifty IT index outperformed the Nifty 500 through nearly 14%, as defensives ruled the roost. But ever for the reason that extensive markets commenced ultimate rallying month, the IT index has given up the maximum of these profits.
Another manner of looking at its miles that it’s a return to ground realities. There become a little motive for IT shares to outperform by a large margin, given the rising headwinds to the global financial system and the related chance to enterprise momentum.
Industry surveys display flagging production activity in important economies, which in turn has induced a reset in boom expectations.
Sure, increase costs in the ultimate quarters have advanced, control statement at investor meetings imply persevering with deal momentum. But the sustainability of the acceleration in sales increase may be hard if the macroeconomic state of affairs keeps going to pot.
“We do no longer see acceleration in FY20 for Tier 1 IT and spot threat to consensus growth expectancies, as Tier 1 IT corporations face slowing worldwide boom, structural headwinds of higher publicity to legacy, excessive opposition from challengers, MNCs, Tier 2 IT & insourcing,” analysts at Nomura Financial Advisory and Securities (India) Pvt. Ltd stated in a observe.
An analysis of the client financials by way of Nomura suggests stability, no longer a rebound in the banking, monetary offerings, and insurance (BFSI) segment. BFSI is the main enterprise vertical for IT organizations. Adding to the worries is the recent appreciation inside the Indian foreign money.

Rupee depreciation advantages are normally plowed returned into the commercial enterprise through pricing modifications. Now, with worker usage ranges attaining most excellent tiers and charges on the increase, a company rupee can emerge as a profitability headwind unless pricing improves materially. “The impact ought to get exacerbated by the yearly wage-hikes across maximum players and the visa expenses which can be generally effective in the first zone. We see confined headroom inside the ‘brief’ levers along with bench control and shipping mix. Thus, an ability margin healing thru 2Q-4QFY19 may be confined,” JM Financial Institutional Securities Ltd said in a be aware.

The silver lining amid all this is a strong call for commentaries from the organizations’ managements. Channel tests by way of JM Financial suggest restricted seen impact of the scary macroeconomic slowdown on decision-making or task flows till now, even though the dealer company expects deal wins to mild sequentially in the present day quarter. How properly the companies manage those challenges may be key for these stocks in 2019.

About the Author