Banking and financial services BFS clients look to curtail discretionary tech spends in the first half of FY 24 in the wake of Silvergate, Silicon Valley Bank and Signature Bank bankruptcies in the US and merger of Credit Suisse with UBS in Europe, according to the banking sector woes in the West.
Banks and financial institutions have spent a lot of money on cloud migration and tech upgrades until now, with tech budgets and outlook on tech spending for 2023 being reasonable for most large US banks. Kotak Institutional Equities said that the current situation for the banking and financial services BFS sector in developed markets throws a spanner in the works. The BFSI segment is responsible for at least a third of the revenues of top IT players.
Surviving the current crisis and ensuring adequate liquidity and capital adequacy will emerge as the top priority, leading to prudence on spending. Tech budgets outlined at the beginning of the year can be toned down to match with the increased risks faced by the sector, it said, while suggesting a likely impact on Indian IT growth in 1 HFY 24.
Nirmal Bang Institutional Equities, which has been keeping a bearish position on the IT sector since April 2020, said that buying IT stocks will give sub-optimal returns going forward, as it expects 7 -- 37 per cent of potential downside for its IT universe.
Nirmal Bang says its target PE multiples are not pessimistic as they are still 2 -- 3 times higher than what the IT industry had seen during the last major downcycle in 2008 -- 2009 and are at the higher end of the pre-pandemic range.
Buying Tier 1 IT stocks at current valuations 22 times on a 12 month forward basis is a 26 per cent premium to the pre-pandemic 5 year mean will probably generate a mid- to high single digit CAGR total return over the FY 25 -- 30 timeframe. On a 12 month forward basis, TCS is trading at 25.4 times and is at 1 SD over the mean on a 15 year basis. If one is aiming for low teen returns from the Tier 1 pack and very specifically TCS and Infosys, we believe that the entry point must be much lower, Nirmal Bang said.
Infosys, TCS, HCL Tech, Wipro and Tech Mahindra, which hosted the top five IT firms last week, is cautious on the India IT services sector. IT companies highlighted higher macro uncertainties than 3 -- 6 months ago, it said.
The demand outlook is likely to slow as pipelines remain strong. Companies are vigilant about the recent volatility in the global financial system and its potential impact on demand in their BFSI portfolios. With rising macroeconomic volatility, companies expect clients to focus on cost optimisation projects with quicker returns over long-gestation transformational projects in the near term, according to Nomura.
The foreign brokerage has a 'Buy' rating on Infosys and Tech Mahindra TechM in the large cap pack and Persistent Systems and Coforge in the mid-cap pack. The brokerage has lowered its ratings on L&T Technology Services, LTIMindtree and TCS.
Nirmal Bang agrees with consensus that the IT sector is likely to throw up good cashflows, healthy return ratios, strong return of capital to shareholders and robust corporate governance. What it might be missing is teen level earnings growth over a sustained timeframe beyond FY 25.
Kotak said spending on cost take-outs will pick up but will yield benefits in H 2 FY 24 or later. The brokerage said TCS and Infosys are better positioned, whereas Wipro and Cognizant Technology are vulnerable. In FY 2024, it expects to see more growth between winners and losers.
33 lakh shares vs.