House View: Information Technology

Outlook

• Now that the COVID-19-led push for digital transformation is waning off, both growth and deal win expectations seem to be disappointing.
• Companies have turned very cautious on the demand outlook given the macro challenges in western economies.
• Attrition remains elevated even though compensation expectations are cooling off.
• The unavailability of lateral talent on site is leading to elevated subcontracting charges.
• Discretionary costs, such as travel, facility expenses etc. are an additional margin headwind.

 

Key risks 

• Earnings expectations look elevated from a growth standpoint and could lead to earnings cuts.
• Depreciation of the rupee against the dollar may not necessarily be beneficial given that the dollar is strengthening against currencies like the Euro and pound.
• Lack of large deals, which leads to lower predictability in the portfolio.

 

Tailwinds

• Continued demand for cloud migration/optimization deals.
• Possibility of offshoring deals because of the inflationary environment in developed markets.

 

(House View aims to regularly provide readers with Kotak Mahindra Mutual Fund’s latest updates on various sectors)

 

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The views discussed here are as on end of Sep 2022.

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