By Ayushman Baruah
Despite a depreciating rupee against the dollar, IT stocks are under pressure due to macroeconomic uncertainties in key markets such as the US. The BSE IT Index has lost more than 25% since January. The rupee has depreciated by approximately 7.5% against the dollar in this time.
Typically, IT stocks and rupee are inversely proportional as Indian IT services companies earn a lion’s share of their income in dollars. The US accounts for about 70% of the revenue for most of these firms.
Indian IT services companies are facing headwinds due to numerous factors like supply-side pressures, fall in demand due to global economic challenges, high attrition, and pressure on margins.
The possibility of an impending recession in the US is one of the major factors driving slowdown in the sector. The management of top IT companies like Tata Consultancy Services (TCS), Infosys, and Wipro have indicated during the first quarter earnings that although the overall demand environment remains strong, there has been a cut in IT budgets in select pockets.
“Corporates in the retail, manufacturing, and telecom verticals are expected to tighten IT spending amid the highest inflation rates in the past two decades in the key US and EU markets. Hence, revenue growth from these verticals is seen moderating to 11-13% this fiscal from 15-17% last fiscal,” Crisil Ratings said in a report.
The margins of IT companies continue to be under pressure for the medium term due to higher employee costs, low graduate uptake, limited increase in pricing, travel expenses, and high onsite inflation.
“Sharp margin misses across scale IT services vendors in the June quarter were deeper than feared with incremental growth coming at lower margins. We expect the margin erosion to persist in the medium term and stay meaningfully below long-term trends,” analysts at JP Morgan said.
Tanvi Shah, associate director, Crisil Ratings, agreed. “The operating profitability will moderate to the pre-pandemic lows of 22-23% given the rising employee costs, both to retain talent amid high attrition and maintain a larger employee base. In fact, net employee addition by tier 1 players was at an all-time high of 2.7 lakh last fiscal amid high attrition, which peaked to about 21% in the fourth quarter of the fiscal from 10% a year ago. Besides, revival in international travel and higher discretionary costs will also weigh on operating profitability,” Shah said.
Cognizant Technology Solutions has lowered its full-year revenue growth guidance to 8.5-9.5% in constant currency, down from 9-11% earlier, indicating a slowdown in growth. Analysts have pointed out that peak revenue growth may be behind for most IT companies that reported robust earnings during the pandemic as demand for digital and cloud computing services soared.