Over the past six to eight months, Tech Mahindra and Infosys have experienced a 40% increase in stock valuations, which Sandip Agarwal, a Fund Manager at Sowilo Investment Managers, describes as trading at a very decent valuation. A significant portion of positive news has already been factored into these valuations.
As Infosys, Wipro, TCS, and HCL Tech report their Q2 earnings, there is discussion regarding the potential for gradual recovery in the sector. According to Agarwal, the most significant part of the fiscal year has passed, and given the seasonal challenges of the third and fourth quarters, expectations for sequential revenue growth and positive surprises are limited. Emphasis is now on FY26 for improvements in revenue growth and margins.
A notable point of discussion has been the IT stocks’ remarkable performance in the last six months, observed by the market as being forward-looking and already discounting future positive developments. Agarwal draws parallels with the Nasdaq’s performance last year, highlighting a trend where good present numbers result in a market bottom, leading to recovery during less favorable future conditions.
However, it is asserted that while the fundamentals in the IT sector appear strong, various challenges are impacting revenue growth. Key factors include the upcoming US elections and ongoing Middle Eastern crises, which prompt companies to conserve resources. Additionally, economic uncertainty makes clients hesitant to commit to immediate spending, even as attrition rates decline and margins improve.
The quality of new deal wins, especially in emerging technologies such as cloud, analytics, and generative AI, are viewed cautiously. Agarwal notes that dealing in these new technologies does not necessarily yield more profit compared to traditional areas where companies have long-term expertise.
In terms of sector recovery, the BFSI segment shows signs of improvement, carrying significant weight given its contribution to Indian tech revenue. Although some results exhibit regional weaknesses, BFSI’s resurgence is a positive indicator for overall sector growth. Yet, the challenge lies in assessing how much of this recovery is already factored into stock valuations.
Regarding profit margins, challenges primarily stem from pricing pressures and not from wage hikes, as many firms have adapted to stagger these hikes over several quarters. The critical issue remains high attrition, which can sharply impact margins due to associated training and salary costs. Recent trends of decreasing attrition rates are likely to be beneficial for margins.
Finally, regarding hiring trends in the IT sector, a slowdown in recruitment is noted, with multiple companies reporting reductions in headcount over consecutive quarters. However, as bench strengths remain low and utilisation rates are satisfactory, it is anticipated that there will be a positive turn in hiring activity in the coming quarters.
