IT services face risk due to banking challenges, says Bernstein research

IT stocks which were already reeling under pressure for the last year now face fresh concerns due to the financial sector volatility in the US. IT sector indexes, NIFTY IT and BSE IT both have declined around 22 percent in the last 1 year and 8 percent in the last month.

“The collapse of Silicon Valley Bank (SVB), Signature Bank and the merger of Credit Suisse/ UBS due to liquidity concerns has brought uncertainty to banking tech budgets,” said Brokerage firm Bernstein research.

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Financial services is the largest industry vertical for Indian IT services companies and contributes around 30 percent to its revenues, it said.

The brokerage has reduced FY24 growth forecasts for companies under its coverage by 3-4 percent and earnings estimates by 3-9 percent while downgrading Wipro to ‘underperform’ which has the highest contribution from banking vertical at 35 percent.

“We remain positive on selective large caps — Infosys (OP, top pick), TCS (OP), Tech M (OP). We downgrade Wipro to Underperform on weaker growth outlook and highest exposure to BFSI. We downgrade ER&D-focused plays (LTTS) where growth impact will be higher driven by vendor consolidation (billion dollar playbook) while valuations remain premium (25x NTM P/E),” it added.

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The brokerage expects growth recovery in H2FY24 and growth to even out on a 2-year cycle, “Digital transformation led by cloud still remains a multi-year trend and will help sustain a double-digit growth momentum in the medium term.”

Margin tailwinds such as low attrition, less subcontractor costs and reduction in wage inflation will drive EPS (Earnings per share) growth stronger than revenue growth, it said adding that margin expansion during FY24 should reduce risk of EPS downgrades.