IT Stocks Look Muted

The IT sector in India has started to seem cloudy in the current global economic environment. This comes to the fore when you compare the BSE IT Index and the Sensex YTD and find that the index has largely under-performed with returns of negative 0.7 per cent while the Sensex touched 9.09 per cent. Among the biggest players of the sector, Infosys had investors disappointed in mid-April mainly due to the lower-than-expected guidance for FY12-13 which was in the range of Rs 38,431 crore and Rs 39,136 crore. This range estimates a YoY growth of 13.9 to 16 per cent, which triggered a downward plunge in the stock by over 12 per cent. Moreover, it missed its guidance for Q4 2011-12 by Rs 539-560 crore.

Over the last two quarters of FY11-12, Wipro too was questioned over their weak guidance figures. To top it up, the figures for FY12-13 have been muted, leading to a considerable downfall of the stock price. Amidst these subdued growth estimates, TCS celebrated its USD 10 billion annual revenue and showed optimism regarding the year ahead. Unlike its peers, TCS does not give quarterly or annual guidance. At the same time, the management has expressed its confidence in beating NASSCOM’s guidance of 11-14 per cent for FY13.

A number of reasons have been attributed to the below-than-street-expectation performance of the IT companies in India. The prevailing uncertainty in large economic markets like Europe and the U.S. has been affecting demand and the decision-making process. UK’s economy too fell deeper into recession than expected when it contracted by 0.3 per cent in the first quarter of 2012. Given this fogged visibility, it is rather difficult to be clear about the estimates.

Looking more closely at Infosys, it is now grabbing attention after a leading financial daily reported on Monday that it is delaying the hiring of its planned 28,000 new recruits to mid-2013 from September this year. At the moment, approximately 70 per cent of its nearly 1.5 lakh employees are working on active projects. As the work load reduces, the number of employees sitting idle has been on the rise. Also, there has been increasing ambiguity about the guidance issue due to increasing cross-currency fluctuations. The guidance is calculated considering certain fixed exchange rates and the current movements have been in the negative as opposed to what had been considered then.

This may require Infosys to lower their guidance by 0-1 per cent. The stock price of Infosys has fallen by over 1 per cent after the Economic Times published a related report. The currency fluctuations may negatively affect the estimates but the depreciating rupee, which today is seen pivoting around Rs 56 per USD, would mark a gain in the earnings of these IT companies. Though the sector seems dodgy on the short-term, there is optimism over the long-term on the back of opportunities and potential demand.

Table 1: Guidance By Top Three IT Companies (Last Three Quarters)