Asian stocks stall as US rates seen higher for longer Asian stocks braked around two-month highs on Thursday, while the dollar nursed modest losses, after the U.S. Federal Reserve chose not to hike interest rates for the first time in 17 months, even if it opened the door to more hikes ahead. The Fed left its benchmark funds rate window at 5-5.25%, and chair Jerome Powell said the U.S. central bank needed to gather more information about the economy to determine what to do next. Committee members surprised markets by projecting two more 25 basis point hikes this year, sending short-term U.S. yields higher and closing out bets on any cuts in 2023. The euro, made a one-month peak after the decision at $1.0865 and now, at $1.0826, awaits a European Central Bank meeting later in the day where markets expect an eighth straight rate hike will take borrowing costs to two-decade highs. “The market takeaway was that rates would stay high for longer, rather than spike upwards in line with the shift in projected Fed funds rate. “Two-year Treasury yields jumped as much as 13.5 bps in the session, before settling two bps higher at 4.69%. Ten-year yields fell 3 bps to 3.79%. Fed funds futures pricing didn’t budge all that much, but expectations for a hike next month firmed a little and traders pushed any hopes for cuts deeper into 2024. “The conditions we need to see … to get inflation down are coming into place,” Powell said. “But the process of that actually working on inflation is going to take some time.” CHINA SLOWDOWN In Asia the focus was on China where industrial output and retail sales figures fell short of market forecasts in the latest sign the economic recovery isn’t living up to hopes. China cut a key benchmark, its medium-term loan rates, by 10 bps and the yuan hit a six-month low of 7.1783 per dollar. “Expectations are building that additional stimulus will come from Beijing and this could be the much needed catalyst for the Chinese market to overcome a disappointing first half,” said Tai Hui, Asia-Pacific chief strategist at J.P. Morgan Asset Management. Elsewhere strong Australian jobs data leant some support to the Aussie dollar, which was broadly steady at $0.6786, while the New Zealand dollar was on the ropes after data showed the economy shrank into recession this year. That likely confirms an end to rate hikes and the kiwi was last down 0.7% at $0.6163. The euro, which has been grinding higher on the dollar for about two weeks on signs of slowing U.S. inflation and hints of cooling in the labour market faces its next test when the ECB meets later in the day. A 25 bp hike is expected. In Japan data showed exports unexpectedly rose in May, but the pace of growth was a crawl. The yen slipped about 0.5% to 140.74 per dollar, though moves were capped ahead of a Bank of Japan meeting on Friday. Oil dipped slightly with benchmark Brent crude futures down 0.16% to $73.08 a barrel. Gold, which pays no income, was pressured by expectations for U.S. interest rates to linger at high levels, and fell to a two-week low of $1,934 an ounce. Bitcoin dropped 3% overnight and nursed losses at $25,049.
Services miss estimates; Software better than expected: Services business grew 0.6% q-o-q cc and missed HCLT’s Q3FY23 guidance, mainly due to a 3.8% q-o-q cc decline in the ER&D segment. Growth in the IT&BS segment moderated slightly to 1.6% q-o-qcc but was in line with estimates. BFSI and Life Sciences were the key growth drivers, while communications were the drag among verticals. Growth was led by the Americas region, while Europe and ROW posted declines.
Decline in bookings reflects delays in decision-making: HCLT won 10 large deals in services and three large deals in Software with net-new deal TCV of $2.1bn, down 8% y-o-y. Deal wins were driven by the services portfolio, were centered on cost optimisation and vendor consolidation and came mainly from BFSI, manufacturing and Life Sciences verticals. Management highlighted a ramp-down in discretionary spending in Hitech and communications verticals but pointed to a strong deal pipeline.
FY24 guidance in line with expectations: HCLT has guided for 6-8% y-o-y growth for overall business and 6.5-8.5% y-o-y cc growth in services segment and 18-19% margins in FY24—all in line with our assumptions. We maintain our FY24-25 cc revenue growth and margin estimates and expect HCLT to deliver 6.5% cc revenue growth and 18.4% margins in FY24. However, we lower our earnings forecasts by 2% to factor the higher tax rate indicated by the management.
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Raise PT: HCLT has fared better in Q4, particularly in North America and BFSI, unlike its peers. However, rising demand uncertainty as a US recession nears remains a concern. HCLT’s stock at CMP trades at 17x PE and offers a 5% yield, which in our view should limit downsides and derating. Hence, we raise our target PE to 17x (16x earlier) and raise our PT to Rs 1,125, offering 8% potential upside.