India’s tech blue chip Infosys reported a 13.4 percent rise in its consolidated net profit for the quarter ended December 2022.
Earlier this week, the country’s largest IT firm Tata Consultancy Services Ltd (TCS) posted 11.02.
Percentage growth in profit for the quarter. Technology companies have withstood the vagaries of the economic recession, fueled by high inflation, high interest rates and falling growth rates around the world.
What is going right for the tech industry?
Infosys’ operating margins in the third quarter were resilient as cost optimization benefits offset the impact of seasonal weakness in operating parameters. Attrition has also come down meaningfully in this quarter and this is a positive development for the company.
“We feel the company’s (Infosys) performance will continue to be resilient due to strong traction in its digital division and continued focus on operational efficiency,” said Manish Chaudhary, head of research at Stoxbox.
While the global economy has been plagued by high inflation and interest rates, tech companies have maintained their growth momentum in overseas markets as well.
Among key markets, North America and the UK led the way with 15.4 percent growth, while Continental Europe saw 9.7 percent growth.
Among emerging markets, Latin America grew by 14.6 percent, India by 9.1 percent, Asia Pacific by 9.5 percent, and the Middle East and Africa by 8.6 percent, TCS said.
Meanwhile, “Our revenue growth was strong in the quarter with both digital business and core services growing. This is a clear reflection of our deep customer connection, industry-leading digital, cloud and automation capabilities and the relentless commitment of our employees,” said Salil Parekh, CEO and Managing Director, Infosys.
What is the vision of the IT industry?
Globally, experts expect more uncertainty in consumer technology as the tailwinds of Covid-19 continue to wane, energy prices rise in Europe and global economic activity slows.
“We believe segments like consumer IT hardware, gaming, e-commerce and digital advertising may have a slightly longer road to recovery. We expect consumer discretionary spending to weaken as unemployment rises and excess household savings built up during the pandemic downturn amid persistently high inflation,” said Jonathan Curtis, portfolio manager at Franklin Equity Group.
In fact, it started playing out in the second half of 2022, leading to negative valuations in the semiconductor, consumer personal computer (PC), gaming and Internet industries.
Fitch Ratings has said that the Indian IT industry outlook for 2023 is stable. “We expect Indian IT services companies’ revenue growth to slightly outpace global competitors in 2023 and 2024,
Because customers prefer low-cost IT vendors in the midst of an economic downturn. During the global financial crisis of 2007-2010, revenue in US dollar terms of Indian IT companies expanded at a CAGR of 16 percent – outperforming global peers such as Accenture plc, Capgemini SE and Atos SE. ” said Fitch.
What is the impact on the IT sector?
High inflation and sharp rise in interest rates in the last four quarters are two factors that could cast a shadow over the sector. This has forced companies to cut their IT budgets amid talk of a recession.
While high inflation and rising interest rates increase firms’ cost of capital, they also eat into individuals’ disposable income and force them to reduce their spending amid a weak macroeconomic outlook.
This directly affects the outlook of technology companies – be it regarding their products, services or advertising revenues – and thereby their stock prices. For Indian IT majors, unfavorable macroeconomic conditions in the US and Europe will dampen order flows, business growth, earnings and stock prices.
How do tech companies fare in stock markets?
“The valuation still looks attractive relative to historical averages and we believe there are limited downside risks going forward,” said an analyst at a brokerage firm.
The performance of the stock market clearly reflects the concerns of the markets regarding IT companies, recession concerns in the US and Europe and its impact on Indian IT companies.
During the period April 1, 2022 to January 12, 2023, the BSE Sensex gained 1.14 percent, while the IT index declined 21.28 percent on the BSE.
Leading IT majors TCS (-18 percent), Infosys (-24 percent) and HCL Technologies (-21 percent) have already declined from 52-week highs.
In fact, there has been a sharp decline in the stocks of IT companies by mutual fund and foreign portfolio investors. However, IT companies like TCS and Infosys have also announced returns at a good price to shareholders.
IT and technology companies have seen a sharp rise in valuations as they have gone all digital during the Covid era and there has been confidence in their growth. Even stocks of America’s top tech companies have not regained those highs amid growing worries about an economic slowdown.
If the US tech giants struggle, it is unlikely that India’s IT sector, which relies on business and revenue from the US and other developing economies, will go unscathed.
However, as the prices of IT companies have seen a decline due to growth concerns in the US and Europe, experts believe that moderation in inflation and stability in interest rates will lead to an upward shift in the share prices of these companies.
So, in the medium to long term, it may not be a bad idea to invest in the fall of leading IT majors,” said a fund manager at a leading mutual fund.
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