With the banking and financial sectors in the developed economies especially the US – a segment that contributes a sizeable chunk to the domestic software services exports – under stress, analysts said there is a likelihood of further earnings downgrades in the sector that could weigh down shares of these companies in the near future.
The Nifty IT index, which had hit an all-time high in January last year, is now down by nearly a third. In March so far, the index has declined almost 6% after the collapse of two US banks and the troubles at Credit Suisse.
“Globally, BFSI, which is a large sector, and contributes to a large share of earnings for Indian IT companies is under stress right now, and there is still some uncertainty about what kind of runway this stress can have,” said Sahil Kapoor, market strategist at DSP Mutual Fund.
“So it will probably cloud the earnings growth outlook, and that I think will cause some amount of consolidation and correction in the IT space,” he said.
Banking, financial services and insurance or BFSI is the largest vertical for Indian technology companies, and brings in 35-40% of their revenues on average, with some of the smaller companies getting an even larger chunk of their sales from this sector.
Concerns over troubles in the US and European financial systems have heightened fears that spending from this sector is likely to see a slowdown, which could impact growth for Indian companies. “There was anyway a risk of slowdown which was being factored in…the banking crisis has added to the worries in the short-term,” said Mayur Patel, fund manager for equities at IIFL Asset Management.Kotak Institutional Equities said in a note that technology budgets outlined at the start of the calendar year can be toned down to align with increased risks faced by the sector
In the past month, TCS is down 5.7%, Infosys has fallen 6.7% and HCL Technologies is down 2.3%. Shares of small companies have dropped sharper. Coforge and Mphasis have slumped over 15%, while Persistent Systems has declined 8%.
The recent drop in share prices has eased concerns over steep valuations. The Price to Earnings (PE) ratio for most companies in the sector, which had touched a peak of 25-26 times their one-year forward earnings, has now corrected to about 16-22 times after several months of underperformance. Still, their valuations are slightly above their long-term averages.
