Can inflation derail the IT story and that also is going to have a huge bearing on the clients’ spends that we are going to see going forward?
Yes, it has already started to play out. From an IT services companies standpoint, this is more on the supply side. These are some of the challenges which most of the companies have in any case been navigating for the past many quarters. So, what was more of an offshore centric talent supply crunch, seems to be permeating more in onshore geographies too. This wage inflationary environment is likely to continue, although we do understand that it has tapered off from the recent peaks.
I think that would be the base case and that is likely to continue for next two to three quarters or so. It is also an indicator of demand because what we are talking about is the longevity of high growth. One must bear in mind the fact that there is longevity of demand and propensity to grow higher for a longish period of time. That has not really changed.
While some of the risks, which are associated with the macroeconomic environment can get bigger, it is manifesting more from an increasing cost of equity that has resulted in this correction. From the demand standpoint, most of the top clients or enterprises have been giving out in terms of the trajectory of tax spend a fair amount of confidence that these numbers are not at risk.
We have seen misses on margins on all counters barring maybe a . Going forward, what would your play be? Many are announcing it could be Infosys for the growth story, Mphasis as a defensive play or for the 5G play?
Interestingly, if we just look at how it is played out, the stock correction has been a function of the derating that has happened and in fact on a YTD basis or period slightly more than that, the earnings upgrade has not really happened.
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One can make a case that the rate of earnings upgrade has flattened out but the estimates have been actually flattish. There have been few downgrades. If I look at some of the mid-tiers, even on a YTD basis, more than mid single digit upgrades are taking place. That really corroborates into this strong demand that is likely to continue.
We do see some pockets where some of the challenges can get a lot bigger but the kind of bookings that most of these companies have had is with a lot of these bookings making short sighted deals. That gives a good amount of visibility in the near term
So we are looking at companies where there is very strong growth visibility and the structural diversity continues to remain strong.That is the cut that we are looking for. If I have to name some stocks, we should probably take some of these. Infosys and HCL Tech from the tier ones and from mid tier companies, we like Persistent Systems or an Mphasis.
Valuations aside, is it fair to compare the kind of fall and meltdown that we have witnessed in tech stocks on the Nasdaq with Indian IT?
While the correlation is not very large, they are obviously comparable. The comparables are more in the global IT services. The correlation is much higher if we look at the broader S&P 500 basket. One of the things that we have seen historically is a scenario that there is a slowdown in growth, whether it is US GDP or S&P 500, with a lot of them being end customers.
The growth premium that mid tiers enjoy over the tier I IT or largecap, tends to come down and that is fairly highly correlated. But yes, there has been valuation which has been correlated to Nasdaq in the past but it is more correlated to the S&P 500. There have been cuts in the recent past but we will be monitoring how that progresses.