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Challenges Lurk For Indian IT Companies Before Growth Acceleration

Despite the recent correction, information technology (IT) stocks have done exceptionally well this year. The Nifty IT index is up about 30%, compared to the 4% rise in the Nifty 50 from a year ago. For a few companies such as Tata Consultancy Services Ltd, growth has picked up meaningfully this year, while others have talked about robust order wins, implying acceleration in revenue growth rates in the future.

Even though the growth acceleration theme is yet to play out at an industry level, concerns are already emerging. An analysis of financials of end-clients of IT firms by Nomura Securities indicates a status-quo demand environment, rather than any suggestion of a ramp-up in IT spends.

“Client financials suggest: 1) BFSI stability, but not a rebound; 2) Retail and consumer packaged goods acceleration might not last; 3) Healthcare could stay soft; 4) Telecom could stay sluggish. How the recent crude price fall reflects in energy (strongest vertical) demand is the key to watch,” analysts at Nomura said in a note. BFSI is banking, financial services and insurance.

Also, continued softness in the eurozone manufacturing sector means global economic recovery remains a worry. Europe will have to navigate Britain’s exit (Brexit) from the eurozone. The fear is that these concerns will weigh on IT spends. Besides, there are other uncertainties such as tariff wars and the US stance on visas.

Results of Indian IT firms also indicated company-specific issues. For instance, shares of Mindtree Ltd fell more than 15% after it announced weaker-than-expected results.

Of course, the recent recovery in Indian IT is scripted on digital deal wins and stabilization in traditional business verticals. But the scenario will change if the feared slowdown in global economy materializes and investors will do well to provide a buffer for disappointments.

“(We) believe consensus view of acceleration in FY20F could have downside risks, as tier-1 IT companies face slowing global growth, structural headwinds of higher exposure to legacy, high competition from challengers, MNCs, Tier-2 IT and insourcing,” added analysts at Nomura.

The continued outperformance of IT stocks, however, seem to ignore most of these risks. – Livemint

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