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Experts flag sector growth concerns post HCL stock rout

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The Indian IT industry may be entering a phase of uncertain demand owing to macroeconomic challenges.
India’s third largest software services provider by revenue, HCLTech, late on Thursday
said it may clock annual revenue growth at the lower end of its guided range, pushing stocks lower by 6.5% on Friday.

The commentary underscores the uncertainty that the whole industry may be facing, according to several analysts.

Nomura, in a note, said it refreshed the revenue growth for around 1,000 listed firms in its global 2,000 list and noted that the calendar year 2023’s revenue growth outlook has continued to worsen since September this year.
“Tech budgets are linked to revenue growth of enterprises, indicating further slowdown in demand in the coming quarters. In particular, BFSI, manufacturing and technology verticals have seen the most decline in the past three months,” the Japanese brokerage house said in the note released earlier this month.
For Indian IT services companies, the pain is likely to be more pronounced in interest rate-sensitive sectors like mortgage and capital markets in the BFSI vertical, discretionary retail, and pockets of manufacturing, it added.

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Morgan Stanley also said the negative macro commentary could possibly become an Indian IT sector-wide issue.
“Overall, we remain broadly comfortable with our FY23 estimates post the update, but could see some near-term share price reaction given incremental negative commentary around revenues. We don’t think this is a company-specific issue and it could eventually turn out to be a sector-wide issue,” it said in a research note.

Two years ago, the Indian IT sector was on a favourable wicket with management commentaries indicating that the players would benefit from a multi-year tech spending cycle.

Now, the tables have turned.

Analysts say the macro-impact on annual budgets of clients may spill over to Indian IT companies.

“Some of the macros – like furloughs and drop in discretionary spending in tech, telecom and other verticals – is a little bit more than what we expected at the beginning of the quarter. We think it is a December-phenomenon because of the furloughs…given the narrow band and macro feedback we have today, we will be at the lower-ends of our guidance for overall level at 13.5%-14.5% and 16-17% growth in (constant currency) in services business,” said C Vijayakumar, chief executive and managing director,
said during its Investor Day event in New York on Thursday.

“We do expect this (furloughs and discretionary spend drops) to be an industry-wide problem and not an HCLTech specific one. While there was no discussion on specific numbers by either Infosys or Cognizant, we get the sense that December 2022 and possibly March 2023 are likely going to be growth challenged quarters for the industry; may be a bit more than earlier anticipated,” said Girish Pai, head of research at brokerage house Nirmal Bang.

“We also believe that instead of a typical budget flush, there is likely under-spending of budgets that could affect December quarter revenue. We are also not sure whether the IT industry will have great visibility about spending in 2023 as we expect budgeting to be delayed and/or short-term oriented (quarter by quarter) …” Pai said in a note.

Discretionary spends account for 15-20% of a typical IT annual budget, which will be under severe pressure, experts told ET earlier this month.

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