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Warning signs for the IT sector as Nomura downgrades TCS, Wipro, HCL Tech and others

information technology | May 26, 2022 1:24 PM IST

Warning signs for the IT sector as Nomura downgrades TCS, Wipro, HCL Tech and others

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Brokerage houses like Nomura are cautious about the IT sector and have revised their stance on some key players like TCS, Infosys etc.

Former US President Donald Trump's immigration policy forced Infosys, Tata Consultancy Services (TCS), etc., to increase hiring in the US. Cut to five years later: Joe Biden is now the US President, inflation is high globally, and retaining talent has become a major hurdle for the IT sector.

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Indian companies have had to increase salaries substantially (in double digits at least). Infosys CEO Salil Parekh himself got a 88 percent hike last year. Even a company like Apple has seen its pay budget balloon 45 percent.
Considering these factors, brokerage houses like Nomura are becoming cautious about the sector and have revised their stance on key players.
The salary hikes are adding pressure on the margin front, and there is a fear that though the demand side is fairly okay after the reopening of economies with the COVID-19 pandemic ebbing, margin pressure will sustain for some time.
Speaking to CNBC-TV18, Kishor Patil, co-founder, MD and CEO of KPIT, said, "Salary budgets will go up. But there are two other points (to consider). One, many of the clients in a key technology area are open to compensating to some extent. The second is that if the overall demand environment slows down, I guess it will also ease some pressure on employment. That is a hope. I cannot 100 percent say that, but this is how I see it right now."
The IT sector, which had a good bull run after the pandemic-induced market crash in 2020, has seen an 18 percent fall in the past three months.
Abhishek Bhandari of Nomura, the author of the report titled "Brace For A Slowdown", believes there will be a material slowdown in revenues of IT companies.
"Historically, we have seen a very strong correlation between the revenue growth rate of those underlying clients to the revenue growth rate of Indian IT companies. So, we're just warning that there might be a significant slowdown in the revenue growth rate going into the next year. But, just to be very clear, it will still be close to double-digit growth in FY24, which would be marginally better than the pre-COVID level," Bhandari said.
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