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TCS, Infosys shares trade near 1-year lows as IT stocks remain under pressure

Shares of Tata Consultancy Services (TCS) and Infosys have fallen significantly this year amid the underperformance of the Indian IT stocks as analysts see more pain for the sector and a potential slowdown in dollar revenue growth in the face of impending macroeconomic stress. The IT index has been one of the worst hit sectors, falling over 27% so far this year, underperforming benchmark Nifty 50 index.

Top IT company TCS’ shares are trading near its record low level of 2,973 apiece on the BSE it had hit in July. The IT stock is down more than 20% in 2022 (YTD) so far. For the quarter ending June 2022 (Q1 FY23), TCS reported a 5% rise in quarterly profit from a year earlier, missing analysts’ estimate, as rising employee costs squeezed earnings even as demand remained robust.

Meanwhile, Infosys shares hit its 52-week low level of 1,360 on the BSE in Thursday’s early deals. The second-largest IT services firm, with its stock down about 27% this year, reported a lower-than-estimated 3% rise in June quarter net profit as operating margin declined on rising expenses.

Last week, global brokerage and research firm Goldman Sachs downgraded TCS and Infosys’ rating to sell from buy, saying it remains more sanguine on the EBIT margin forecasts than on revenue of Indian IT companies, given multiple levers such as higher employee utilisation, controls on variable pay and annual wage hikes.

“Given the upcoming macro slowdown (not recession) our macro team expects, which is percolating down multiple leading demand indicators, we believe Indian IT sector USD revenue growth will start to materially slow down from here, weighing on the secular tailwinds highlighted above. Hence, we cut our FY24E USD revenue growth forecast for the top 5 companies by 4ppt to 6% year-on-year (yoy) on average vs. our earlier forecast of 10%,” the note stated.

India’s top IT services firms have started freezing or cutting staff bonuses, worried that tightening budgets at the US and European clients who are bracing for a recession will sharply hit their own profit as the pandemic-led boom fades out.

The views and recommendations made above are those of individual analysts or broking companies, and not of Mint.

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