Information technology stocks are likely to remain under pressure in the near-term amid headwinds emanating from the worsening economic situation in key global markets and financial market volatility, according to analysts.

While the country's largest software exporter, TCS reported a 5.2 per cent rise in the June quarter net profit on Friday, kicking off the latest earnings cycle, IT shares have been sliding, with the BSE Information Technology index tumbling nearly 24 per cent so far this year.

Cross-currency headwinds and large scale talent churn resulting in higher wage hikes could add to the challenges, especially in terms of the impact on operating margins, analysts opined.

Though it is early to draw conclusions, the ongoing political developments in the United Kingdom, where Indian-origin Rishi Sunak has thrown his hat in the ring to be the prime minister, are being closely watched. Sunak is the son-in-law of Infosys co-founder, N R Narayana Murthy.

"In US and Europe, the macro environment shows signs of worsening...There will be an impact on the IT sector..IT stocks are likely to remain under pressure," Aditi Patil, Research Associate at brokerage firm, Prabhudas Lilladher said.

Impact on the IT sector

Reflecting the negativity, the five IT constituents of the 30-share benchmark, Sensex have slumped to 43 per cent.

So far in 2022, Tech Mahindra, Wipro, and HCL have plunged 42.68, 41.38, and 25.38 per cents, correlatively. In the case of TCS and Infosys, the IT bellwethers, the decline has been 12.63 per cent and 19.87 per cent, respectively.

In 2022, so far, the BSE Information Technology index has tumbled 9,046.44 points or 23.90 per cent, hitting its 52-week low of 26,827.24 on June 17. On January 17, it reached its all-time high of 38,713.3 points.

So far, the Sensex has declined 3,771.98 points or 6.47 per cent, hitting its 52-week low of 50,921.22 on June 17.

Efforts to gain market share

Tanusree Banerjee, Co-Head of Research of Equitymaster, said while IT companies are likely to face some margin pressures due to cross-currency headwinds in the near-term, vendor consolidation and captive monetisation efforts will help gain market share.

"The outlook for the long-term remains good with deal pipelines remaining strong," Banerjee added.

Last week, the rating agency, Crisil in a report said the information technology service sector will see a sharp fall in revenue growth to 12-13 per cent in FY23 from 19 per cent in FY22.

Apurva Prasad, VP for Institutional Research - IT, HDFC Securities, said there is a high probability of double-digit growth outcome for the IT sector in the medium-term and the structural drivers more than offset any macro variability.

"Risk-reward is favourable for tier-1 IT as current valuations imply a modest growth ask-rate; at the same time, mid-tier IT will sustain its growth premium. We have a constructive stance on the IT sector," Prasad said.

V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services, said IT stocks, after the recent sharp correction, are fairly valued.

"However, there are concerns arising out of the fallout from a possible recession in the US and sharp slowdown in other key markets," he said, adding that the TCS Q1 results indicate good revenue situation but there is pressure on margins due to salary hikes for employees.

While noting that IT stocks are likely to remain under pressure, Aditi Patil said, "I believe for the coming results (of other IT companies), there won't be positive surprises. Stock prices will remain under pressure. IT stocks may fall further from this level." On Friday, TCS Managing Director and CEO, Rajesh Gopinathan, while announcing the quarterly results, hinted this was the bottom for the margins, attributing the fall to annual wage hikes and promotions.

At a time when worries are being expressed about recessionary pressures in countries like the US, which is the biggest market for TCS, Gopinathan had said it has been doing client surveys to look for any early signs of softening in demand for its services.

"We are seeing steady demand from our immediate conversations with customers for the short-term and medium-term. So, all projects that are currently going on, pipeline conversions, all of that indicate a steady demand environment," he said.

"In senior-level discussions, there is increasing discussion about the recession, no different from what you and I are reading in newspapers. We don't see an immediate footprint of it on our demand side. From a pipeline perspective, the pipeline build is quite strong and the nature of deals remains," he said.

According to the Crisil report, the current depreciation in the rupee, and strong demand for new age technologies like artificial intelligence, cloud computing, and Internet of Things will help the over USD 220-billion sector maintain double-digit growth.

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