Infotech stocks take a tumble on revenue warnings; valuations plunge

K Venkatasubramanian BL Research Bureau | Updated on January 24, 2018



Greece, new tech adoption woes also among major worries

It seems to be the a season of IT companies forewarning investors on the likelihood of tepid revenues and earnings. After Persistent Systems and KPIT Technologies, Tech Mahindra on Monday indicated that there could be a revenue decline for the June quarter as it faces lower traction in the mobility segment.

Clearly, the negativity surrounding the software sector is growing. Many frontline IT players have had two successive quarters of earnings disappointment. Now if the June period too turns out to be a damp squib as the companies portend, then the derating of stocks may well continue for a while.

Stocks, such as KPIT Technologies, Hexaware Technologies, MindTree, Tech Mahindra and Persistent Systems have been hit hard.

Valuations hit

Except TCS and to some extent HCL Technologies, which have remained a little resilient, stocks in the segment have corrected anywhere between 20 per cent and 40 per cent in the last few months. The decline in price levels has meant that even mid-tier IT stocks that had commanded price-earnings multiples of 20-21 times, now trade at just 13-15 times FY16 earnings, going by analyst estimates available with Bloomberg.

Despite attractive valuations, there seems to be no rush among investors to get into IT stocks.

Tech adoption worries

The default concerns surrounding Greece, a weakening of the Euro and higher costs which Indian software players are likely to incur as they hire locally at on-site locations, mean that both revenues and profits are likely to be under strain.

Another industry-wide concern pertains to whether Indian vendors would be able to latch on to newer deals in the IT landscape from areas such as digital transformation, cloud, analytics, mobility and social media. In this regard, global IT majors such as Accenture and IBM have made a headstart. As the bulk of outsourcing deals are likely to come from these segments, the ability of domestic IT players to match up will decide whether they can get on.

Published on June 29, 2015

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