InvestorQ : Why has Goldman Sachs turned cautious on the IT sector in India?
Ria Jain made post

Why has Goldman Sachs turned cautious on the IT sector in India?

Dia Deshpande answered.
2 weeks ago

Goldman Sachs turned cautious on the Indian IT sector but it has been rather selective in its choice of companies. It is concerned about the impact of a possible slowdown in the US, UK and Europe on the top line or the revenues of these large IT companies. After all, tech spends are going to be hit badly if there is going to be an economic slowdown. Hence, Goldman Sachs has downgraded TCS and Infosys from “Buy” to “Sell”, in the light of the impending macroeconomic stress. However, Wipro has been upgraded by Goldman.

According to Goldman, much of the rebound story post the pandemic had already played out in the market. For instance, the report has underlined that much of the valuation boost for the Indian IT sector post the pandemic came from 3 major factors. Firstly, as manpower became a major challenge, outsourcing took off in a big way with Indian IT benefitting. Secondly, offshoring was another trend that got a boost in the post pandemic period, allowing IT companies to cut down costs. Lastly, digitization and cloud migration made a big difference to IT companies.

Now the concern is not so much on the operating margins, which should improve with falling costs. Instead, the concerns are with the top line or the revenues of IT companies. Goldman is wary of impact of a potential economic slowdown on technology spending. As a result, it is not just that the volume of business, but even pricing power is likely to be squeezed quite sharply, creating a double whammy. It has actually cut the top line growth for the top 4 IT companies from 10% to 6% and that shows a huge 400 bps pressure.

However, even as JP Morgan and Goldman Sachs remain negative on the Indian IT sector, there are the likes of BNP Paribas that are positive on the IT sector. According to BNP, despite near-term pressure and recessionary concerns, valuations of IT companies are reasonable after losing 27% in this year. BNP Paribas has underlined that one must not underestimate the ability of the Indian IT sector to consistently reinvent itself, as it had done time and again in the past. That remains a major edge for Indian IT sector.