Tata Consultancy Services (TCS) and Infosys, two of India’s largest IT service providers, have been downgraded by Goldman Sachs from “buy” to “sell,” with the investment bank noting a likely slowdown in their dollar sales growth amid looming global financial hardship. However, because of Wipro’s appealing values and a recent uptick in its order book, it changed its recommendation from “sell” to “buy.”
Following a hotter-than-expected inflation report in the US that dashed any dreams of any loosening of the Fed’s monetary tightening, the domestic markets had a turbulent start on Wednesday. The S&P BSE Sensex fell more than 700 points to trade at 59,867 levels, while the frontline indexes Nifty50 fell more than 150 points to trade below 17,900 levels.
TCS reported a total net profit of Rs 9,478 crore for the June 2022 quarter, up 5.2% year over year. When compared to the same period last year, the company’s revenue for April through June 2022 increased by 16.2% to Rs 52,758 crore from Rs 45,411 crore. In the same period of the prior financial year, the company’s net profit was Rs 9,031 crore.
“The Indian IT sector benefitted from three secular tailwinds during the pandemic: outsourcing, offshoring and digitalization on the back of accelerated cloud migration. Given the upcoming macro slowdown (not recession) our macro team expects, which is percolating down multiple leading demand indicators, we believe Indian IT sector USD revenue growth will start to materially slow down from here, weighing on the secular tailwinds highlighted above. Hence, we cut our FY24E USD revenue growth forecast for the top 5 companies by 4ppt to 6% yoy on average vs. our earlier forecast of 10%,” Goldman analysts said in a note.
“Despite a high base, y-y industry revenue growth stayed strong in 1QFY23, adjusting for cross-currency impact. In terms of USD revenue growth, India-based IT services companies continued to outperform the global IT services industry. Consequently, India-based IT services industry’s market share improved 44bp y-y. EBIT margin for the overall IT industry fell to 16% (-62bp q-q) as supply-side challenges continued, along with wage hikes and increased subcontracting expenses,” BNP Paribas said.
Top IT service providers in India have begun to freeze or reduce staff bonuses out of concern that shrinking budgets at clients in the US and Europe who are preparing for a recession will severely hurt their own profit as the pandemic-driven boom fades.