The $ 194 billion sector whose software services have helped businesses embrace online shopping and remote work epidemic practices this year has seen demand declines as workers return to office and the Russia-Ukraine war relies on spending from European clients.
“We are seeing a downward trend from top revenue growth and EBIT margin inflation behind us, meaning a return,” JPM said.
“While the downside from most services, software and SaaS names YTD is positive and the technical spending cycle is structurally volatile, we think there are even worse risks in terms of current earnings estimates.”
Brokerage expects the slowdown to worsen in 2023 due to a possible fall in orders from key U.S. markets, where economic growth has begun to weaken.
It downgraded Tata Consultancy Services Ltd, India’s top IT exporter, from “neutral” to “underweight” rating but remained “overweight” in the competition.
Although the industry’s margins are expected to narrow due to the talent war which has increased the cost of hiring and retaining workers, Infosys’s margin reset is quick and gives it bandwidth to keep investing and growing, JPM said.
Infosys, the industry’s No. 2 player, reported a 3% drop in operating margins for the January-March quarter.