Rating: attractive; IT services: Digital spending to continue in long term TCS and InfosyS both reported earnings with two common factors, though Infosys was a bigger surprise compared to TCS. These factors include a decline in demand from North America, with some discretionary programmes being put on hold or cancelled, as well as challenges in flexing margin levers due to sticky near-term costs at the start of a slowdown. While we acknowledge the heightened headwinds that may affect multiples in the near term, our long-term perspective on margins and growth remains unchanged. Stocks to avoid are the ones trading at premium multiples after assuming elevated growth and margin assumptions. The slowdown was sharper than expected. Infosys and TCS reported q-o-q revenue declines of 3.8% and 0.8%, respectively, in North America. The revenue decline in North America was across verticals on a sequential basis. The reasons for the decline were a pause in discretionary programmes and even cancellations. After a slow start in January, projects were paused in February and it continued in March. The banking crisis in US regional banks and European banks in March 2023 has induced greater caution and could impact the June quarter. Kotak expects FY24 to remain weak for IT firms. Also read: 2023 the likely end of conventional and dawn of new creator economy? In response, companies may pursue cost optimisation measures, including opportunities related to cloud and SaaS consumption. TCS and Infosys are best positioned. HCLT and LTIM can benefit in select cases. Similar cost take-out opportunities, but among smaller enterprises may be addressable by a larger pool of companies. Many other companies will struggle—growth between leaders and laggards should widen in FY2024 and beyond.
However, he believes that the impact on the Indian market is going to be temporary since there could be some short-term impact on flows into Indian equity markets. But since the Indian economy is on a strong wicket and will continue to remain resilient.
“Improved fiscal situation, controlled current deficit, stable interest scenario combined with good corporate earnings should lead to limited impact on the Indian bond market and equity market too,” he added.
The midcap and smallcap indices took a bigger knock with the BSE MidCap fell 2.51%, while BSE SmallCap index dived 4.18%. According to Amnish Aggarwal, head, research, Prabhudas Lilladher, the valuations were already high and some correction was expected. “If the situation sustains as it is then further correction can’t be ruled out,” Aggarwal said.
Telecommunication and industrials indices were the top laggards with BSE Telecommunication declining 3.82%, followed by BSE Industrials falling 3.26%. JSW Steel (-2.99%), Tata Steel (-2.52%) and Tata Consultancy Services (-2.44%) were the top losers of Sensex.
Surprisingly, both foreign portfolio investors and domestic institutional investors were net buyers today. While, FPIs net bought shares worth Rs 252.25 crore, DIIs have purchased shares worth Rs 1,111.84 crore, as per provisional data from exchanges.
Calling this a “normal phenomena” Pankaj Pandey, head, research, ICICI Direct said, “I will not really give too much weight to a single day buying figure. Amid concerns of elevated interest rate and geopolitical tensions, in a typical market cycle, 8-10% correction is possible at any point in time.”
The brunt of geopolitical conflict, elevated interest rates and rising crude oil prices was also felt by other Asian- Pacific markets. Jakarta Composite Index lost 1.57% followed by Shanghai Composite Index and PSEi, which fell 1.47% and 0.89%, respectively. Nikkei and KOSPI declined 0.83% and 0.76%.