The ongoing Russia-Ukraine war and wage inflation are likely to keep the margins of Indian IT players subdued and the early trends of that may be seen in the Q4FY22 earnings that will start next week.
IT bellwether TCS will announce its March quarter scorecard on April 11.
The IT sector remains one of the preferred sectors of many analysts and brokerages for the long term but the near-term challenges remain overhangs on margins.
As per a report by brokerage firm Dolat Capital Market, while commentary for most IT companies still remains upbeat with ‘best of the decade growth prospects’, there will be spillover impact of the current geopolitical situation has not been incorporated in the guidance.
Dolat Capital does agree that there is no first-order impact on client and delivery base but the double impact for global corporations both on revenues and costs can not be ignored and is definitely not baked in hyper-optimistic estimates for IT services providers.
"The current global geopolitical situation has brought undue hurdles for large global corporations which can, in turn, create headwinds for their IT vendors. These hurdles range from: (1) Revenue Impact of 1-5 percent as they either exit from the Russian market or committed to ‘no new business in Russia’, (2) commodity price led cost impact, and (3) potential consumer demand softness due to high consumer inflation," Dolat Capital said.
Western governments have imposed multiple sanctions on Russia, effectively making it difficult for any corporate to do business in Russia. Dolat Capital highlighted that many MNCs have voluntarily announced complete or partial exit from Russia, which in turn may impact their revenues by 1-5 percent.
"We believe this event will bring headwinds for Indian IT players in the form of: (1) 'Delayed decision-making' cycle over the next few quarters which may soften the TCV (total contract value) momentum, (2) no case for pricing hike in CY22 to cover wage-inflation as client face cost pressures in the core business, and (3) lower spends over CY22 and CY23 as the current situation and cost environment puts digital transformation on the soft pause in boardrooms," said Dolat Capital.
The brokerage firm has cut its earnings estimates by about 2-3 percent within its coverage universe and has also cut the PE multiples aligned to revised growth expectations.
"We maintain our positive on the sector from a relative performance basis given lower commodity inflation impact but remain selective in our approach within the sector and would assign an 'overweight' stance on select names such as HCL Tech, Mphasis, LTI and would suggest 'equalweight' on Infosys and 'underweight' on rest of the names," said Dolat.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie.