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Although known to be a resilient sector to invest in times of global macro uncertainty, IT stocks may continue to witness pressure this time. Neelkanth Mishra, India Equity Strategist, Credit Suisse, says he has gone underweight on IT services sector because he sees a never-seen-before challenge of revenues coming under pressure.
“The challenge is that if an offshore IT engineer delivers $35,000-40,000 annually in revenue, the SAS company is generating $80,000-100,000 per software engineer. Therefore, their ability to pay is that much more. This is an issue we have been flagging over the last year-and-a-half. I think the business structure and business model of what IT services companies pay and therefore what revenues they generate are going to come under pressure,” Mishra said.
The other reason why he sounds bearish on IT stocks is the expensive valuations.
The seasoned market expert said as these two adjustments happen, growth will get downgraded. The margins which used to be 5-6% and went up to 12-15%, are now at 10-12%, and will need to fall to 6-8%, he said. “You will see a downgrade in PE multiples. That is why we are underweight IT services.”
So far in 2022, has lost over 20 per cent of its value, 22 per cent, 10 per cent and 36 per cent.
Fundamentally, however, Mishra says IT services is a great sector to be in when there is global macro uncertainty. “They have great balance sheets, great cash flows, supreme quality management and great corporate governance. Everything is very attractive. The problem is it is a very expensive sector.”
In his portfolio, Mishra has started adding healthcare stocks because it has become cheaper. “It has underperformed for many years now. The challenge is it is a very stock specific sector but has a very defensive characteristic and therefore we have gone overweight.” Besides, he is also bullish on airline stocks as they have the pricing power.
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)
“The challenge is that if an offshore IT engineer delivers $35,000-40,000 annually in revenue, the SAS company is generating $80,000-100,000 per software engineer. Therefore, their ability to pay is that much more. This is an issue we have been flagging over the last year-and-a-half. I think the business structure and business model of what IT services companies pay and therefore what revenues they generate are going to come under pressure,” Mishra said.
The other reason why he sounds bearish on IT stocks is the expensive valuations.
The seasoned market expert said as these two adjustments happen, growth will get downgraded. The margins which used to be 5-6% and went up to 12-15%, are now at 10-12%, and will need to fall to 6-8%, he said. “You will see a downgrade in PE multiples. That is why we are underweight IT services.”
So far in 2022, has lost over 20 per cent of its value, 22 per cent, 10 per cent and 36 per cent.
Fundamentally, however, Mishra says IT services is a great sector to be in when there is global macro uncertainty. “They have great balance sheets, great cash flows, supreme quality management and great corporate governance. Everything is very attractive. The problem is it is a very expensive sector.”
In his portfolio, Mishra has started adding healthcare stocks because it has become cheaper. “It has underperformed for many years now. The challenge is it is a very stock specific sector but has a very defensive characteristic and therefore we have gone overweight.” Besides, he is also bullish on airline stocks as they have the pricing power.
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)
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