Nifty IT has underperformed Nifty by 5% since the past one month. The correction can be attributed to headwinds of slowing revenue growth, reduced margins, elevated consensus expectations and of course stretched stock valuations, in addition to a weak macro environment.
“We do believe valuations have contracted materially, but the price paid for high earnings growth is still elevated. We strongly suggest to investors that deployment in Indian IT services segment should be very slow and gradual as we believe there will be many unknown risks ahead, which might further hamper the valuations,” the note stated.
The start of slowdown induced by central bank policy tightening is already being seen. Among mid-caps, it has retained pecking order: Coforge, MTCL and Persistent Systems. Among large-caps, the brokerage has recommended TCS, Infosys, HCL Technologies, Wipro, Tech Mahindra.
It has downgraded Mphasis’ shares rating from Buy to Add. Further, given the recent sharp correction over the past month, the brokerage has upgraded its rating on Newgen to Buy.
“Emphasis on costs will likely lead to dampening of tech budgets and reduce discretionary spend. Macro factors such as GDP, PMI, S&P 500 revenues and CEO confidence are worsening by the day,” ICICI Securities added.
“We expect a ‘J line’ curve in cost items in the P&L in FY23/FY24. For example, travel costs, which accounted for 2-3% of revenues, are down to ~0.5% now. Going forward, we will also have to take into account the already high inflation, which might push travel costs (and other costs too) way higher than pre-covid levels,” it added. ICICI Securities still believes the fallen stock prices have not yet fully captured all the headwinds on growth and margins.