Follow us Now on Telegram ! Get daily 10 - 12 important updates on Business, Finance and Investment. Join our Telegram Channel https://t.me/InvestmentGuruIndia
Download Telegram App before Joining the Channel
IT stocks have fluctuated wildly in the past six months. They first underperformed the broad market as IT companies did not really gain from a cut in corporate taxes announced in September. Then, since December, they began recouping most of the losses as a result of worries about the domestic economy that drove down other stocks and also because of the confidence about healthy order books.
Infosys Ltd reported a 56% jump in large deal wins in the nine months to December, offering growth visibility. Softness in the banking, financial services and insurance (BFSI) business vertical aside, Tata Consultancy Services Ltd (TCS) booked contracts worth $6 billion in BFSI in the same period.
However, with Covid-19 rearing its ugly head and the global economy facing renewed pressures, IT stocks are on the decline again. Analysts have begun flagging risks to IT companies, though they are not pressing the alarm bells yet.
The Organisation for Economic Co-operation and Development warns that global economic growth can almost halve in 2020 if the virus epidemic deepens. The US 10-year Treasury yields dropped below 1% for the first time ever over fears of a supply shock to the global economy.
To cushion the impact of global slowdown, many expect the US central bank to cut policy rates again this year. However, record low interest rates and a downtrend in bond yields can weigh on fixed income industry, posing growth headwinds for banking and insurance clients, warns Nirmal Bang Institutional Equities.
The silver lining is that the order backlog will cushion companies from sudden disruptions. However, business uncertainty can slow execution. “We believe one of the key things to watch out for would be management commentary on ramp up of the large deals won. In the past stressed macro situations, customers had pulled back on execution of large contracts as they saw impending pressure on their financials," said Nirmal Bang Institutional Equities in a note.
Travel restrictions can also pose challenges to the service capabilities of Indian IT firms and new deal wins. Industry events that foster business development are taking a hit. The cancellation of this year’s Mobile World Congress is a case in point.
The slowdown in global travel, hospitality and consumer retail sectors can have a noticeable impact on small and medium-sized firms such as NIIT Technologies Ltd, Hexaware Technologies Ltd and Mindtree Ltd as they have a higher exposure to these industries, warn analysts.
Companies are still assessing the impact. A compilation of global corporations’ commentary by Kotak Institutional Equities shows only a marginal impact to their sales so far.
However, if the virus disruption lasts longer, clients will be forced to rethink on IT spends. That is the risk investors should take into account. “A short period of uncertainty (say a month) will limit the impact on business. However, extended impact can lead to discussion on IT spending curtailment," says analysts at Kotak.