It was supposed to create a digital transformation revolution. Businesses of all shapes and sizes were supposed to embrace it quickly to hold on to customers. Digital technology-based outsourcing was supposed to drive rapid business for Indian IT services companies. Over the past year, though, share prices of IT service firms have barely moved. While the Nifty IT index has moved in line with the NSE Nifty over the past year, other sectors like banks and industrials have done better in price action.
You may say that Indian IT services have done better than the US tech sector, where share prices have tumbled. Most large technology companies in America have announced job cuts every other day. In the latest quarterly results announcements, TCS, the most prominent software services exporter in India, announced a cut in headcount of over 2,000 employees. According to the company data, it is the first time TCS has done that in 10 quarters.
In an earnings call after the result, TCS highlighted the challenges customers face as they seek more business. There is caution while transitioning to cloud computing from local network computing. The high cost of such a transition is slowing the IT spending by large US-based customers. Most companies have to review their system architecture and actively manage the transition.
The financial services sector accounts for over a third of the revenue generated by companies like TCS and Infosys. In the earnings call, Infosys management said signs of the slowing global economy are visible. The company flagged sectors like mortgages, investment banking and financial services, telecom and retail as more impacted than others. That was delaying decision-making and creating uncertainty in spending on technology services.
The underperformance of the IT services companies shows that the market is concerned about the weakness in the global economy and the impact it has on IT spending by large corporations. Indian IT services firms depend on such spending by large multinational companies in the US and Europe. While there may not be an expectation of solid financial performance, companies like TCS and Infosys have large balance sheets that generate free cash flows. They have profit margins superior to other firms in the US or Europe. They return money to shareholders regularly in the form of dividends and buybacks.
As an investor, you may want to look at this sector to diversify your portfolio risk. For now, the businesses riding on Indian economic growth are doing better than IT services firms. However, the financial performance moves in cycles. When the world economy recovers, IT spending could go up. That will bring more business to these companies if their share prices are beaten down or underperforming, which creates an opportunity for you to enter these solid businesses at a low valuation.
If you are new to investing, the tools offered by Alphaniti can help you identify the right combination of stocks. If you are looking to rejig your portfolio, you can still use Alphaniti’s tools to make the right choice.
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