The rate hikes could spell bad news for the Indian IT companies which earn a large chunk of their revenue from companies in the US
Earnings of Indian information technology companies like Tata Consultancy Services, Infosys, HCL Technologies, Wipro, Tech Mahindra and L&T Technology Services are likely to get impacted negatively going ahead over possible hikes in the interest rate in the US, analysts have warned.
On Friday, Federal Reserve Chair Jerome Powell delivered a stark warning about the Fed’s determination to fight inflation with sharper interest rate hikes.
The message landed with a thud on Wall Street, sending the Dow Jones Industrial Average down more than 1,000 points for the day.
“These are the unfortunate costs of reducing inflation,” Powell said in a high-profile speech at the Fed’s annual economic symposium in Jackson Hole. “But a failure to restore price stability would mean far greater pain,” he added.
This especially spells bad news for the Indian IT companies which earn a large chunk of their revenue from companies in the US.
The Covid-19-induced lockdowns had forced a lot of companies across sectors to digitise and automate their processes in order to work remotely and that had led to a huge rush of orders for IT companies. The same was reflected in the sharp surge in share prices of the IT companies.
TCS, the country's largest IT company, saw its net profit advance 18 per cent annually to Rs 38,449 crore for the year ended March 2022 as against Rs 32,562 crore in FY21. Counterpart Infosys' net profit rose 17.65 per cent to Rs 21,235 crore for the year ended March 2022 from Rs 18,048 crore in FY21.
Powell's statement would lead to companies cutting down on their discretionary spending which will lead to lower spending by companies on digitization, automating, and cloud migration of their operations, say analysts.
If the macro economy slows down and if the US and Europe go into recession, there will be caution on the part of companies with regard to their tech spending. Growth will take a hit and their revenue and profitability will take a hit, says Devang Bhatt, IT sector analyst, IDBI Securities.
This time around, IT companies are also not getting the benefit of a weaker rupee against the dollar as the street is apprehensive about their large deal wins in the US and Europe which are reeling under very high inflation and fears that they may enter recession, says Karan Harsh, an independent market analyst.
Going ahead, the IT sector can see earnings per share and price equity correction taking place and I do not think they are completely out of the woods, says Bhatt.