Indian IT giants like TCS, Infosys may face speed bumps in short-term
The current fiscal will be anything but an easy ride for Indian software exporters.
The results of Tata Consulting Services (TCS) and Infosys for the first-quarter of the fiscal fail to instil confidence among investors that top IT exporters will be able to improve growth momentum this year after reporting deceleration in the last fiscal.
Investors rushed to sell the stocks of information technology (IT) companies on Friday thereby brining down the Nifty IT index by over 4 per cent in a day, the sharpest fall among Nifty sector indices.
The latest quarterly performance and the management commentary by the country’s top-two IT exporters reveal that while the long-term story looks positive considering the momentum in client additions without sacrificing operating efficiency, growth in the short-term will be slow due to delay in project ramp ups and unexpected slack in demand from clients in certain sectors and from certain service lines.
Likewise, Infosys reduced its full-year projection of revenue growth to at best 12.3% compared with its three-month ago forecast of 13.8% growth.
Two factors will matter the most for investors, the impact of Brexit on Indian IT exporters and the ability of these companies to deliver solutions using new technologies where the growth is faster compared with traditional businesses of application development and maintenance.
Indian IT companies earn over one-fourth of revenue from the UK and Europe.
While it’s too early to measure the impact of Britain’s decision to leave the European Union, commonly known as Brexit, preliminary assessment suggests that the demand from the region may slow down in the medium term as clients take time to adjust to changes in the local business and tax environment.
TCS and Infosys so far have not reported any major shift in demand from Europe.
The other factor of adopting new technology platforms such as social media, mobility, analytics, and cloud computing (SMAC) will be crucial since businesses are looking for solutions that improve operating efficiency and sustainability.
Top and some of the mid-sized IT exporters have started adapting to the changing priority of clients by growing their revenue exposure in these areas. A bright spot is the sustained momentum in the new business.
After adding over $757-million worth of large deals to the kitty, Infosys reported another $800- million worth of new deals for the June 2016 quarter.
For investors, these trends mean a greater volatility in IT stocks in the near term. While booking short-term gains may become tricky, it also means that long-term investors may find more opportunities to make fresh purchases at relatively lower valuations.