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Tech Titans: How TCS Share Price Reflects Industry Trends

The Indian information technology (IT) sector, which has been an immediate driver of the country’s economic growth, is experiencing a sudden decline. This downturn has impacted big IT companies like TCS, Infosys, HCL, and Wipro, leading to a drop in their stock prices. But why is this happening?

To understand the reasons behind the decline of the Indian IT sector, we need to consider both local and global factors. On the domestic front, companies like TCS have reported lower financial results and growth projections, indicating a slowdown. Additionally, the overall economic slowdown in important Western markets like the US, which contribute a significant portion of revenue for Indian IT firms, is also a major factor.

It seems like the Indian IT industry is facing some challenges due to factors like rising inflation and decreased spending on technology. This is having an impact on the outlook for major IT companies like TCS and Infosys, as well as investments in the IT sector. We need to take a careful look at these issues to understand what it all means.

Understanding the Indian IT Sector Landscape

Before delving into stock-specific factors, it’s essential to acknowledge the broader role of Indian IT on the domestic front. Over the past three decades, software exporting giants like TCS and Tech Mahindra have shaped the very DNA of India’s growth story. Today, the IT and business process management (BPM) sector contributes nearly 7.4% of India’s gross domestic product (GDP) – making it an apex engine for job creation and economic progress.

Market estimates suggest the total revenue from the IT and BPM sector could hit nearly $300 billion by 2025, clocking double-digit growth rates year-on-year. Today’s sector employs over 5 million directly, with leading firms like Infosys, Wipro, and HCL Tech ranking among the top recruits from premier engineering colleges. Needless to say, the performance of IT stocks has ramifications for a broad spectrum of Indian economic stakeholders. n addition to the IT sector, the share price of HDFC also plays an important role in the Indian economy.  The performance of HDFC share prices reflects sentiment around the real estate and banking sector. As a heavyweight in the banking and financial services space, HDFC’s share price movement sends signals on the broader economic outlook.

Early Cracks Emerge – The Accenture Saga

In many ways, developments in the global IT environment – especially the US – set the tone for Indian counterparts who draw the bulk of their revenues from mature Western markets. This correlation was evidenced recently when Accenture – an IT consulting major – lowered its growth forecasts for FY2023, citing multiple economic ‘headwinds’.

More specifically, Accenture trimmed its revenue growth outlook from 4-5% to just 1-3% for the next fiscal year, marking a drastic 50% slide in expectations within a few quarters. The revised guidance was revealed as part of the company’s latest quarterly earnings update. Accenture CEO Julie Sweet pinned the pessimistic business outlook on a ‘tale of two realities’ – resilient demand for digital transformation on one hand and cautious client spending in other verticals amid inflationary pressures.

The decision sparked a sharp sell-off in Accenture shares, which tanked over 10% intraday on September 23. But more crucially, it reinforced a slowdown in major Western IT spending – a backbone for Indian IT firms with high offshore exposure. In fact, within hours of the Accenture earnings call, selling pressure was witnessed in heavyweights like TCS and Infosys, too, on fears of a spillover effect from weakening global tech budgets. 

Unpacking the Indian IT Selloff

In the domestic context, early tremors were felt when TCS reported subdued growth in Q1FY23 – falling short of street estimates. Though net profits rose by 5.2%, experts noted red flags like shrinking margins, elevated attrition rates, and the management’s cautious volume guidance amid macro uncertainties. The miss on quarterly expectations was enough to spark the downslide for India’s most valued IT franchise. TCS share price is down nearly 15% from their 52-week highs in January 2022.

Next in line was Infosys, which saw its shares plunge over 4% intraday on July 25 after its Q1 results. Despite reporting robust growth in net profit and revenues, INFOSYS, too, witnessed shrinking margins down 150 basis points year-on-year. The company’s 14-16% full-year revenue guidance reflected tempered optimism in light of global inflationary headwinds that could cap tech spending from clients. Infosys shares continue to trend downward, correcting over 25% from 52-week highs.

Besides the scoring misses on Q1 scorecards, Indian IT majors are plagued by global recession fears that look as real as ever. The rising risk of slowdowns in the US and Europe – two regions that yield almost 80% of yearly revenues for TCS, Infosys and Wipro – threatens to curtail new software contracts. Cognizant CEO Brian Humphries hinted at this risk by stating that the ‘timing of large outsourcing decision’ remains hard to predict. The US-based IT provider lowered CY22 revenue guidance in line with dampening economic sentiment.

This aligns with reality on the ground. In recent years, stellar growth posted by Indian IT giants has been steered by a megatrend – digital transformation and cloud migration strategies adopted by global corporations as part of post-pandemic priorities. But with worries over recession in the US turning prominent, analysts fear budget cuts on IT infrastructure upgrades. That explains the kneejerk investor reactions to tempered guidance from sector heavyweights.

As investors look for alternatives during such downturns, they might also consider the stability offered by other sectors, such as banking, with strong performers like HDFC Bank. Monitoring the HDFC Bank share price could provide insights into safer investment opportunities amidst the tech sector’s volatility.

Conclusion 

Indian IT companies heavily reliant on banking, financial services, and manufacturing sectors may face challenges during economic downturns, particularly in the US. Despite this, there are indications that the recent downturn in the tech sector may have slowed. TCS and Infosys, for example, now have attractive valuations compared to historical levels. Additionally, these companies are better positioned than smaller peers to weather economic uncertainties. Expanding into new markets like Canada, Europe, Asia Pacific, and the Middle East can help offset any potential decline in US orders. Major brokerages are optimistic about stocks like Infosys and HCL Tech despite short-term uncertainty in the Indian IT sector.

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