Broader slowdown imminent but manageable; HCL, Infosys top picks: Kotak Institutional

The brokerage is of the view that the signs of slowdown have now broadened. The slowdown, which originally was seen among small and midsize businesses (SMBs) and self-serve segments, has gradually penetrated in the industry segments. There is now visible reprioritization of tech spending towards areas that will fetch quicker RoI and even higher focus on cost-efficiencies.

Though the impact of uncertain macros is well acknowledged by most software companies. There is a view that there is still a rise in tech budgets, though some companies may still be cutting them. “Cloud and SaaS adoption trends will moderate, with the uncertain macro being the barrier, even as the aspiration of enterprises to adopt modern tech stacks will continue to be high. Clients are optimizing cloud usage to make room for new workloads to the cloud— the classic save on legacy to invest in digital themes,” noted the report.

The macro uncertainty has also taken a toll on the deal win parameter both in respect of the size as well as the duration. And on whether the IT services will be impacted, the brokerage is of the view that programmes related to changing the business spends can be impacted. Medium-sized cost takeout programmes can get accelerated given the renewed focus on costs – this will include application rationalization and vendor consolidation. Megadeals involving large onsite rebadging, captive carve-outs may yet not be on the cards.

The brokerage further suggests that though the nearterm broader slowdown looms, it is still manageable. The brokerage believes that there will be witnessed moderation in growth rather than a decline in IT services spending. It expects global IT services spending growth to moderate to 2-3% in CY2023 from 7-8% in CY2022. “Cost take-out programmes will benefit Indian IT. We acknowledge that a recession can lead to a further moderation in global tech spending. A recession will also induce enterprises to embark on mega multi-year outsourcing/offshoring programmes that will yield benefits to Indian IT,” added the brokerage.

Amid such a momentum, the brokerage maintains a ‘buy’ on 3 IT stocks, namely, HCL,

and and from within this list HCL and Infosys are its top picks.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)