IT Stocks Plunge As Nomura Sees More Evidence Of Revenue Slowdown
Nomura says revenue growth outlook has worsened since it first downgraded the IT services sector in May this year.
Shares of India's top IT companies opened lower as Nomura said it sees more evidence building up for revenue growth slowdown for the sector in the next calendar year.
The revenue growth outlook has worsened since it first downgraded the Indian IT services sector in May this year, the research house said in a note. Technology and communication and media stocks have seen the sharpest Bloomberg consensus revenue cut both in 2022 and 2023, it said.
"In CY23E, consensus revenue growth forecast is cut for all industries (except for life sciences). Given a high correlation between the two, revenue growth rate risk for Indian IT services due to underlying clients’ financial performance has significant risks in FY24. In the near term, flush-out of tech budgets for 2022 and deal wins from previous quarters mean that growth risk in FY23 is lower."
It said the tech budget outlook for most industries has been impacted due to inflation and macro slowdown in developed markets. "While cost pressures are likely to increase the emphasis on tech adoption, budgets are likely to be prioritised in areas like automation and cost efficiencies in the near term."
Also, it said India's IT companies also won't have much margin gains from currency depreciation, given that major European currencies have weakened more than the rupee has, against the U.S. dollar.
"This is likely to lead to a replay of Q1 FY23 performance where large caps had limited margin gains from currency depreciation versus mid caps due to lower European exposure for the latter. In the medium term, the deployment of freshers and stabilising attrition are likely to be the key tailwinds for modest margin improvement for Indian IT services companies in FY24F."
Nomura retained its "cautious stance" on the Indian IT services sector. "Investors are likely to get disappointed on margins in FY23 and on growth in FY24. We prefer large caps over mid caps in the current environment."
Shares of all NSE Nifty IT constiteunts ended in the red on Wednesday. The NSE Nifty IT Index fell as much as 3.3%. Infosys Ltd. was the largest drag, fall 4.5%.