Recently, borkerage firm CLSA downgraded the country's technology sector. In a report, CLSA cited a potential slowdown in IT spending by clients in the United States and Europe and changes in visa policies overseas for its pessimism about Indian IT over the next nine to 12 months.
Here's looking into six reasons behind the thumbs down given to Indian IT (as given in the report).
Is 20%-plus growth achievable in FY13/14?
While demand trajectory is good for now, it has flat-lined after the surge last year, posing risks to street revenue forecasts for future years. Also, CLSA’s strategist Russell Napier’s forecast of a rise in US treasury yields to potentially deflationary levels could impact growth prospects.
Visa issue
Newsflow on the visa front continues to be negative across countries with rejection rates in US currently running at almost 40%, up from 5%, 18 months back. We see the visa issue fundamentally altering the business model for Indian techs with its operational (inability to staff projects on time) as well as commercial (higher visa/subcontracting costs) impact.
Valuations of tier-1 techs
Valuations of tier-1 techs need to contend with lower (mid-to-high teens) revenue/EPS CAGR outlook, as well as the challenges from business transformation that lie ahead. The risk of a potential IT spending slowdown further raises the spectre of valuation compression.
Bullish commentary not actionable
Bullish management commentary is comforting, but perhaps not actionable given the already high street expectations (20%+ growth for tier-1 techs over next few years) and the history of the sector’s major moves (2001, 2003 and 2007), where company talk remained positive well into the demand flux.
Uncertainity over FY12
Moreover, while confidence on near-term demand remains strong across vendors, commentary on FY12 growth achievement has gradually shifted from the confident certainty earlier this year to hopes of a 2H pick-up.
Global macro issues
Past trends indicate that expectations of back-ended growth have seldom borne fruit and have been de-railed due to a range of unanticipated causes. We believe that the current macro overhang could likely cause an encore later this year.