Why can BFSI’s weakness reflect on the health of tech companies?

According to Ambit Capital’s analysis of sequential constant currency revenue growth of the top four IT companies, growth in BFSI has lagged behind overall growth over the past four quarters. With a compounded quarterly growth rate of 3%, it has underperformed sectors such as retail, transportation, telecom and media. (See the list)

There are concerns that with recession fears and rising interest rates, top global banks may delay their digital spending. Goldman Sachs and Morgan Stanley have recently indicated they will rethink spending plans.

Kotak Institutional Equities said technology spending trends of major US banks in the June quarter (Q1FY23) indicate a mixed outlook. Kotak said Citi’s tech spending trend will be watched closely, considering this is an important account for many Indian IT providers.

Kumar Rakesh, a senior automobile and technology analyst at BNP, said, “On a sequential basis, revenue from the BFSI vertical remained strong in Q1FY23 for most IT companies, but higher interest rates impacted the tech spending outlook of mortgage and lending businesses. can.” Paribas Securities India. In view of this, the macroeconomic situation in the US and Europe in the coming months will be critical for the sector, he said.

Note that in its Q1FY23 earnings call, Infosys Ltd’s management said, while the overall deal pipeline was strong, it pointed to some moderation in its financial services vertical.

BFSI, Infosys, Tata Consultancy Services Ltd (excluding revenue from India, MEA, APAC ex-Australia and products and platforms) as a percentage of revenue in Q1FY23 stood at over 30% and Wipro Ltd. Among the mid-tier companies, Mphasis Ltd. witnessed sequential growth in the BFSI segment in the June quarter owing to its relatively higher exposure to the mortgage business. Financial services other than mortgages, such as wealth management, have also been affected by the recovery in global equity markets.

“We remain cautious on BFSI growth momentum, as six of the top eight US and European banks have indicated similar or lower technical spending,” said a report by Ambit Capital on August 16. Moderately in the second half of fiscal year 2013 flows through the impact of financial weakening of customers.

Meanwhile, the Nifty IT index is down 22% year on year, outperforming the Nifty 50 index, which has gained 2.3%.

In Q1FY23, some of the key disappointing factors included lower margins due to wage increase, increase in travel cost, and higher subcontracting expenses. Moreover, the job loss rate for most of the IT companies also remains high and is expected to come down only gradually.

Rishi Jhunjhunwala, Senior Vice President, said, “On a FY24 price-to-earnings basis, the valuations of Tier-I and Tier-II IT stocks have declined from their recent peak, but are still trading at a premium to their historical average. are doing.” and Lead Analyst, Technology, Institutional Equities at IIFL Securities Ltd. Margins appear to be improving as supply side pressure eases, but the demand outlook remains critical. “However, the valuation does not offer much above current levels,” he said.

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