Will IT stocks survive recession fears?
Despite a bleak global outlook, top Indian IT giants wrapped up their Q2 earnings in line with the Street’s expectations. What do Q2 results indicate for the IT sector amid growing fears of recession?
High inflation and a rising interest rate environment have seen global agencies such as the IMF and World Bank downgrade global growth estimates, raising recession fears.
However, India’s large-cap IT companies – TCS, HCL Tech and Infosys – broadly withstood these concerns in the July-September quarter. Among frontline companies, TCS and HCL Tech beat expectations supported by sustained demand for digital initiatives. The companies posted quarterly revenue growth of 3.8-4% in constant currency terms.
Wipro, on the other hand, disappointed the Street with a 9% year-on-year drop in profit and a less-than-expected revenue growth of 14.6%. Most companies reaffirmed that they did not witness any signs of demand slowdown, but they remain watchful of trends in key Western markets like Europe. Experts, however, say that the robust deal wins and the commentary on demand outlook hint that near-term growth is likely to stay intact.
Gaurang Shah, Chief Investment Strategist, Geojit Financial Services says commentary on business outlook, deal pipeline comfortable. No major disappointment from Q2 results so far. Recession fears largely priced in stocks. For long-term, allocate 25% of investible funds at current levels.
Even though attrition in companies remained elevated, at above 20% levels, a sequential margin improvement in the range of 16-90 basis points has provided some comfort. Analysts expect margins to continue to improve going ahead as they believe attrition will likely taper down from here.
Apurva Prasad, Vice-President Institutional Research, HDFC Securities says, normalisation of attrition, utilisation, pricing positive levers for margins. Quarterly annualised attrition is trending down. Attrition to start declining in two to three quarters. Have built-in margin expansion in Q3, Q4-FY23.
According to technical charts, shares of Infosys could remain range-bound in the next 3-6 months between levels of 1600-1200 rupees. While those of TCS and HCL Tech could see a good run on crossing levels of 3200 and 1000 rupees, respectively. Wipro, on the other hand, could see a fresh sell-off on breaching support of 378 rupees.
Today, markets will react to US retail inflation reading, while stock-specific action will likely be seen in Infosys and Bajaj Auto.
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