TCS, Infosys, Wipro: BSE IT index sees worst fall since 2008 crisis in FY23; will Q4 results reverse the trend?

The information technology sector in the equity market witnessed heavy selling during the previous financial year ended March 31, 2023, registering its worst fall since the global financial crisis when the BSE IT index plunged 35.60 per cent in 2008-2009. Amid the ongoing slowdown in the global economy and selling in IT majors, the index retreated 21.80 per cent to 28,478.99 on March 31, 2023 against 36,402.74 in March 2022. Earlier, the BSE IT index gained 37 per cent and 106 per cent in FY22 and FY21, respectively.

With a fall of 91 per cent, Cerebra Integrated Technologies declined the most during the last financial year. It was followed by Brightcom Group (down 85 per cent), Xelpmoc Design And Tech (down 70 per cent), Tanla Platforms (down 66 per cent), Intellect Design Arena (down 57 per cent), Mastek (down 54 per cent), FCS Software Solutions (down 49 per cent), Kellton Tech Solutions (down 48 per cent), Mphasis (down 47 per cent).

Market watchers hold mixed views on the sector ahead of Q4 results. IT major Tata Consultancy Services will announce its results on April 12, while Infosys and HCL Technologies will declare their financial results on April 13 and April 20, respectively.

Anand Shah, Head-PMS and AIF Investments, ICICI Prudential AMC said, “While IT companies’ valuations have corrected from the recent peak, the valuations are still above long-term averages. We believe over the next 2-3 quarters we will have better visibility of growth risks emerging out of recent weakness in the US economy and individual company’s commentary around the same. Thus, we believe, that would be time to reevaluate our view on the IT underweight position we are running.”

Data further highlighted that IT majors Infosys and Tata Consultancy Services also declined 25 per cent and 14 per cent, respectively, during the past 12 months. Wipro, Tech Mahindra and HCL Technologies also lost 38 per cent, 27 per cent and 7 per cent, respectively,

Sharing her view on the IT sector, Sonam Srivastava, smallcase manager and Founder of Wright Research believes that the IT sector is well-positioned to outperform in FY24. “Firstly, the pandemic has accelerated the pace of digital transformation globally, and Indian IT companies are well-positioned to benefit from this trend. The shift towards remote work, e-commerce, and online education has increased demand for digital solutions, and Indian IT companies are providing services in these areas,” Srivastava said adding the Indian IT sector has a strong pipeline of contracts and projects, and the trend of outsourcing is likely to continue as companies look to cut costs and improve efficiency.

What to expect from Q4 results?

Nuvama Institutional Equities believes that the March quarter is likely to be a soft one, impacted by weak macros and lower tech spending. Cross-currency tailwinds (USD depreciating against EUR/GBP) should boost reported growth. “Overall, we expect Indian IT services companies to post modest growth in CC QoQ/YoY. Margins are likely to remain flat on a quarter-on-quarter basis—with little operating leverage from modest growth. Outlook for FY24 is also expected to be modest at this point – we expect Infosys to guide for 6-8 per cent CC YoY growth in FY24,” Nuvama said.

Notwithstanding the Q4FY23 results being impacted by weak global macro, Nuvama has a positive view on the sector due to strong deal flow momentum.

“Accenture’s latest results too allude to a strong demand environment in IT outsourcing. We expect a sustainable strong demand environment to drive robust earnings growth for the sector over the next three years. We remain positive on the sector, with LTIMindtree, TCS, Infosys and Coforge as our preferred picks,” the brokerage said.

Brokerage Motilal Oswal Financial Services said that IT companies under its coverage universe is expected to deliver a median revenue growth of 0.8 per cent QoQ and 9.2 per cent YoY in constant currency (CC) terms in 4QFY23. Major currencies have appreciated against USD (EUR over 5.2 per cent and GBP 3.8 per cent), which will provide tailwinds. EBIT and PAT are expected to grow by 1.2 per cent and 3 per cent QoQ, due to weak topline growth,” the brokerage said.

It further expects that Tier-I companies to grow in the range of -0.7 per cent to plus 1.6 per cent QoQ CC (HCL Technologies to be impacted by software business seasonality). Tier-II players are expected to have a wider growth range of -1.1 per cent to over 5.4 per cent QoQ in CC terms.

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