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IT earnings downgrades are a ‘near-term pause’, ICICI Securities

Stocks of information technology companies might trade sideways for 1-2 months as the sector undergoes a broad correction, according to Sumeet Jain, an information technology analyst at ICICI Securities Ltd.

Although technology stocks may see a consolidation in the near future, there is no major derailment in demand, Jain told BQ Prime’s Sajeet Manghat. The current downgrade in earnings is a “near-term pause”, he said.

Shares of IT companies were trading lower on Monday as the NSE Nifty IT index declined 5%, while the NSE Nifty 50 fell by 0.8%.

Jain expects the current margin pressure on tech companies to ease by FY24. “Overall, FY25 should have better growth than FY24, as inflation is expected to slide by the end of this year, which will lead to decreased interest rates by the Fed and percolate consumer demand in the west,” he said.

IT stocks may see a further substantial downgrade only in cases of recession. Sumeet Jain, Information Technology Analyst, ICICI Securities

View On Infosys’ Q4 Earnings
The decline in earnings growth for Infosys Ltd. in the March quarter was unexpected, Jain said. Project cancellations, leadership changes, and the banking crisis in Europe all potentially caused major headwinds for the IT giant, he said.

Stocks of Infosys fell over 10% after the announcement of its Q4 results on April 13. Revenue in the company’s financial services vertical fell 3.7% sequentially to Rs 10,818 crore in the March quarter, according to its earnings statement.

If the decline persists in the June quarter, the company may face the possibility of revised valuations, Jain said.

A downward revision of the company’s margin guidance “is to keep themselves cushioned against upfront costs, in case they win any mega deals and margins slip over 21%”, he said.

According to Jain, companies like Infosys and Tata Consultancy Services Ltd. will not take a hit of more than 10–15 percent because they eventually manage to win mega deals and sustain their clients even during a crisis.

TCS’ revenue rose by a mere 1.6% in Q4, but it clocked a total contract value or new deal wins of $10 billion during the quarter, while Infosys signed large deals worth $2.1 billion.

Growth Of Mid-Cap IT Companies
The growth forecast of mid-cap IT companies could see a decline, as they are influenced by discretionary spending, which is under pressure, Jain said.

The growth rate of these companies may reduce to the range of 14–16%, which could narrow the valuation gap between mid-cap and large-cap tech companies, he said.

However, he expects the growth rate to improve by FY25, given that cloud migration, digitisation and cost optimisation continue to drive structural demand in the space. Bloomberg

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