Nifty IT index slips 5% in two days on earnings, valuation worries

Recently, HCL Technologies said that its FY23 revenue could be at the lower end of the guidance; Credit Suisse warned valuation-led correction in these stocks amid US macro headwinds.

Shares of information technology (IT) companies were under pressure for the second straight day, with Nifty IT index slipping 5 per cent in past two trading days after the management of HCL Technologies said that it expected revenue in financial year 2022-23 (FY23) to come in near the lower end of the guidance band. Meanwhile, Credit Suisse too warned of a 10 - 27 per cent valuation-led correction in these stocks amid US macro headwinds. 

At its investor meeting held in New York on December 8, the management said the revenue growth guidance for FY23 is likely to come in at the lower end of its 13.5-14.5 per cent year-on-year band in constant currency (CC) terms due to higher-than-expected furloughs in BFSI and Hi-Tech segments.

At 09:29 AM; Nifty IT index was down 1.2 per cent, as compared to 0.78 per cent decline in the Nifty 50. In past two trading days, the IT index plunged 5 per cent, as against 1.35 per cent fall in the benchmark index.

This morning, LTIMindtree, L&T Technology Services (LTTS), Infosys and Tata Consultancy Services (TCS) were down in the range of 1 per cent to 2 per cent on the NSE.

Meanwhile, HCL Technologies traded flat at Rs 1,033.90, after falling 1.5 per cent in intra-day trade to Rs 1,012 today. In past two trading days, it has tanked 8 per cent from Rs 1,101 on December 8.

HCL Tech’s management maintained its positive stance on the IT Services and ER&D verticals, and provided its outlook on HCL Software (P&P) business. Though longer term demand remains intact, the management narrowed its growth guidance to the lower end of 13.5-14.5 per cent band due to weaker-than-expected macro, cuts in discretionary spends and higher furloughs. It also aspires the EBIT margin to scale back to 19-20 per cent in the near term.

Higher exposure to Cloud, which comprises a larger share of non-discretionary spends, offers a better resilience to its portfolio in the current context, with higher demand for Cloud, Network, Security, and Digital workplace services, according to Motilal Oswal Financial Services.

Strong growth within Services and ER&D, robust headcount addition, healthy deal wins, and a solid pipeline indicate an improved outlook. Given its capabilities in the IMS, Digital space and strategic partnerships, as well as investments in Cloud, the brokerage firm expects HCL Tech to emerge stronger on the back of a likely increase in enterprise demand for these services.

Meanwhile, Indian IT valuations, Credit Suisse argued, are at large premium to history despite material correction from the top. Their analysis of six large correction cycles for the Indian IT sector suggests that barring a huge sudden macro event such as the global financial crisis (GFC) and Covid-19 pandemic, stock correction is driven mainly by valuation and not earnings per share (EPS). IT valuations, it said, are stretched by every measure, and that will drive a correction in these stocks if the US macro weakens. CLICK HERE FOR FULL REPORT

Further, thus far in the calendar year 2022, Nifty IT index has underperformed the market by falling 26 per cent, as compared to 6 per cent rally in the Nifty 50.