India Tech Valuations Put to the Test as Global Headwinds Put Pressure on Earnings

(Bloomberg) --

India’s IT services giants may struggle to justify their valuations when they kick off Asia’s reporting season next week, as earnings are expected to be the weakest in years. 

India’s tech sector index, which includes Infosys Ltd. and Tata Consultancy Services Ltd., rallied 12% in the three months through December, powered by a global rally in the space after a dovish pivot by the Federal Reserve. India’s tech stocks trade at about a 30% premium to the broader market. Improved sentiment aside, IT earnings remain under pressure.  

“Although sentiment has improved, it has not yet been reflected in actions,” said Mukul Garg and Pritesh Thakkar, analysts at Motilal Oswal Financial Services. Analysts at Nomura expect the ongoing slowdown to weigh on discretionary tech spending into the 2025 financial year. 

Firms in the sector are focused on integrating generative AI into their operations and training employees to use the tool effectively. Earnings at Samsung Electronics Co., which is set to benefit from AI chip demand this year, found support from higher shipments of DRAM chips during the quarter.

Highlights to look out for:

Tuesday: Samsung Electronics’ (005930 KS) bit shipments for DRAM may have grown with higher average selling prices, Bloomberg Intelligence said. NAND sales probably also increased, though average selling prices remain weak. Overall, fourth-quarter revenue was probably steady, while net income fell. HSBC analysts including Ricky Seo expect slight margin pressure on smartphones from rising marketing costs and OLED. The company targets operating profit of 11.5 trillion won ($8.8 billion) in the chip business in 2024, driven by the rebound in DRAM prices and revived chip demand on AI, the Korea Economic Daily reported. 

Thursday: Tata Consultancy Services (TCS IN) is poised to report its weakest quarterly revenue growth since July-Sept. 2020 on cuts in discretionary tech spending by its US and European clients. The firm, which has consistently delivered double-digit revenue growth for the last few years, is forecast for just 3.3% revenue growth, Bloomberg consensus estimates show. Ramp-ups of larger deals, including one with state-owned telecommunications giant BNSL, helped. 

• Infosys (INFO IN) may report its first quarterly profit drop since July-Sept. 2019 as seasonal furloughs coincided with the slowdown in discretionary tech spending. Revenue is expected to be little changed, with inflows from the telecommunications and finance sectors hit the hardest. Infosys, a major employer for the nation’s engineering graduates, shook markets last quarter after it said it had paused hiring to cut costs. Still, BNP Paribas analyst Kumar Rakesh said large firms with strong client relationships will fare better in the current climate, with Infosys a top pick.
• Fast Retailing’s (9983 JP) first-quarter operating profit probably increased, but Uniqlo’s margin growth may have slowed sequentially on higher labor costs and store expansion expenses, BI said in a post-earnings note on Oct. 13. A warmer winter than usual may also have hit sales of autumn-winter clothing in Japan, they added. Analysts at SMBC Nikko expect Uniqlo’s international business to drive earnings growth in the medium term.

Friday: HDFC Life Insurance (HDFCLIFE IN) will report profit falling by more than half as it struggles to gain market share. Analysts at Nirmal Bang Institutional Equities also expect HDFC Life to be especially impacted by a new draft regulation on policy surrender charges.

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