IT Stocks under Pressure after EPAM’s guidance cut: Opportunity or Threat?
Does the recent guidance cut by EPAM Systems spell a bumpy ride for Indian IT firms? Let’s understand its implications for India’s IT sector.
EPAM Systems, a renowned US Information Technology (IT) services firm, has scaled back its growth projections for both Q2 and the full fiscal year. This development is another blow to a sector already grappling with dwindling demand due to growing recession fears in the US and Europe, exacerbated by the Russia-Ukraine conflict. This global situation could have a spill-over effect on Indian IT firms if a similar trend is observed in Accenture's forthcoming quarterly earnings report.
The State of Play for Indian IT Firms
While these concerns are valid, it is crucial to note that Indian IT firms have a balanced portfolio between discretionary and maintenance spending, providing a cushion against fluctuations. Additionally, they are poised to reap the benefits of cost-take-out programs and lucrative deals. Although these benefits might not fully counterbalance the caution being exhibited in spending, the overall sentiment remains hopeful.
Large-cap IT firms in India, with their minimal exposure to EPAM-like clientele, have projected revenue growth in the mid-to-high single digits. Mid-cap companies, meanwhile, aim for double-digit growth. The outlook seems brighter for the second half of 2023, given the US's ability to stave off a recession despite Federal Reserve rate hikes. A resurgence is expected in the latter half of the year due to ongoing digitization efforts and burgeoning AI projects.
Despite the short-term concerns, our long-term outlook for India's IT sector is optimistic. One company that stands tall amidst the storm is HCL Technologies Ltd, with its broad service offerings and well-balanced portfolio.
Spotlight: HCL Technologies Ltd
HCL Technologies’ Q4 FY23 performance was slightly below expectations due to weak discretionary spending, a trend industry experts had anticipated for large-cap IT firms. Despite this, the company managed to increase its net profit by 11% to Rs 3,983 crore in the March quarter, with consolidated revenue up by 18% YoY to Rs 26,606 crore.
The company has a strong client base, boasting 250 Fortune 500 and 650 Global, 2000 clients. It has shown impressive growth (14.9% CAGR over FY18-23), both organically and inorganically. In Q4 FY23 alone, HCL Tech secured 13 large deals worth a total contract value of $2 billion. The robust pipeline, booking, and strong client demand position HCL Tech for a promising FY24.
HCL Tech maintains an impressive operating margin of 18.2% despite rising labour and input costs, reflecting its robust cost management abilities. Furthermore, the management's FY24 guidance hints at revenue growth of 15-17% with a margin guidance of 19-20%. To top it off, a dividend yield of over 4% makes it a compelling choice for long-term investors.
Conclusion
In conclusion, HCL Technologies is a good investment option for those seeking long-term returns in the IT services market. The company has a strong track record, a high-quality management team, and a favourable growth outlook. However, as with any investment, investors should conduct their own research and assess their risk tolerance before making any investment decisions.
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