Do country’s leading IT stocks can underperform? pressured margins admitted to be the cause

analyst Ambareesh Baliga believes that going ahead the trend of subdued margins could be mirrored across the entire IT pack, including mid-size companies

Market Times - market news
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IT majors Tata Consultancy Services and Infosys started the Q4 results season for large-cap companies this week.

While TCS posted steady growth aided by mega-deal wins, Infosys missed analyst estimates on slower revenue, fall in profit. However, both the companies said they foresee a resilient demand environment in FY23 and a strong deal pipeline, but admitted that margins will continue to be pressured.

For instance, Infosys’ margin guidance at 21-23 % for FY23 is 100 bps lower than its earlier guidance in FY22.

Independent market analyst Ambareesh Baliga believes that going ahead the trend of subdued margins could be mirrored across the entire IT pack, including mid-size companies.

Brokerage HSBC Global also sees limited upside to the sector’s revenues in FY23 and 24 as margin pressures remain more precarious than the top-line. The brokerage believes that while some moderation in wage hikes will occur in FY23, the tailwinds will be limited as travel and other costs are likely to come back to some extent.

That said, it has slashed its valuation multiples on Infosys and TCS by 10%, along with reducing the target prices. It has further downgraded its rating on Infosys from buy to hold, while reducing FY23 and FY24 earnings estimates for TCS by 4.6% and 4%, respectively.

At the index level, analysts at ICICI Securities expect that the Nifty IT index, which has been resilient so far this year despite a weak macro environment, may soon begin underperforming the Nifty 50 due to slowing revenue growth, margin woes and elevated valuations.

They say, “Nifty IT index might end up with negative returns in FY23 and multiples for the sector are unlikely to rerate given the impending margin issues and a potential slowdown in discretionary spends due to macro reasons. Additionally, rising interest rates are driving up the cost of equity and should put pressure on stock prices.”