Shares of Indian IT companies witnessed a sharp sell-off in Monday's trade as the country's second-biggest software services firm, Infosys, reported lower-than-expected growth in the fourth quarter's net profit, setting a subdued tone for the Q4 show by the IT pack.
The scorecard of the fourth quarter was below the Street estimates, and what was more significant was that the company maintained a 4-7% revenue growth guidance for FY24, well below analysts' expectations of a 10.7% growth.
This lower guidance was a result of major clients tightening their IT budgets in response to the recent turmoil in the US banking sector. Infosys had last given single-digit revenue guidance in FY19.
In Q4 FY23, the company posted a 7.8% YoY growth in consolidated net profit at ₹6,128 crore. However, the profit fell 7% when compared with the preceding quarter.
Prior to that, Tata Consultancy Services (TCS), the country's largest IT company, also delivered weak numbers for the January-March quarter, missing analysts' estimates.
In its earnings preview earlier this month, JP Morgan stated that Indian IT companies' Q4FY23 results are expected to be weaker than Q3. The report highlighted that constant currency sequential organic growth would be slower due to the deteriorating macro environment, and margins would be flattish to decline.
"The deteriorating macros with increasing stress in BFSI and hi-tech verticals have driven client cautiousness, driving delays in deal ramp-ups and impacting revenue conversion, as well as delays in deal decision-making that we believe would be a pain point even on 1Q24 growth expectations," said the global brokerage firm.
The IT industry experienced several challenges in FY23, including an increase in operating expenses, downgrades by global brokerage firms, rate hikes from major central banks, mounting recession fears and the recent banking crisis in the United States.
Ever since analysts predicted a potential recession in the US, UK, and Eurozone, the value of IT stocks has started beating down. These regions are crucial markets for Indian IT companies, accounting for a significant portion, ranging from 40% to 70% of their overall revenues.
Following the weak Q4 FY23 numbers, shares of Infosys tanked nearly 15% to ₹1,185.30 on the BSE in today's trade. Other IT companies also took a severe beating, with Tech Mahindra, HCL Technologies, TCS, LTIMindtree, Coforge and Wipro all falling in the range of 3–8%.
All the constituents of the Nifty IT remained in the red during the trade, leading to a 7.6% slump in the index. This downturn caused the index to reach a new one-year low.
The Nifty IT finally closed 0.68% lower.
“The IT sector has been a drag on the markets today, with negative commentaries coming on the outlook from key developed markets, including the US. With a high probability of recession in the US, UK, and many European countries, we see uncertainties continuing around the order outlook for the next 1-2 quarters,” said Divam Sharma, founder at Green Portfolio PMS.
"However, some good value opportunities are gradually emerging in the sector. Infosys is now trading at a PE multiple of 21.2 times, anything below 19 times is a great opportunity for investing in the stock," he added.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie.