The fundamental drivers of the IT sector’s growth have remained intact despite a slowdown said HDFC Securities.
The IT index is up more than 40 per cent over the past year, supported by earnings upgrade.
“The absolute return potential for the sector is likely to be moderate, basis growth reverting to medium-term baseline, lower growth dispersion in FY23E as compared to FY22E, and headwinds to multiple expansion based on increase in cost of capital and geopolitical risk premium, inflationary factors, and the lead-lag cycle of cost and pricing.
“The upside risk is on the longevity of high growth rate and downside risk is the second order impact from a prolonged inflationary environment and geopolitical dislocation,” HDFC Securities said.
As per the brokerage house, fundamental drivers for the sector remain intact, aided by continuity of multi-year technology pivot across industries, institutionalisation of operational efficiencies, supported by increase in talent installed capacity, lead indicators remaining robust – growth or outlook by global partners, services peers, hiring activity over FY18-21 and deal trends.
“Incremental tailwinds is premised on pricing – benefits to accrue with a lag based on contract renewal cycle and with increase in scope, INR depreciation, and increased offshoring and diversification of talent base from Eastern Europe by global enterprises.”
Besides, the report said that there is some growth moderation from over 4.5 per cent CQGR over the past six quarters towards baseline levels – with sequential revenue growth estimated at 2.6 per cent QoQ .
“However, Q4 revenue growth of 2.6 per cent QoQ and 16.6 per cent YoY remains well above the historical mark and incremental sequential revenue addition of $470mn is more than 2x the historical revenue adds.”