Wait for the right valuation before getting very bullish about IT sector: Dhananjay Sinha

“As far as IT is concerned definitely there is a concern over slowdown,” says Dhananjay Sinha, Director & Head of Strategy Research and Chief Economist, Systematix Shares & Stocks.

India is doing rather well, things are looking up and the economy is turning over. On the disinvestment front, there is disappointment after disappointment. After Air India, there has been no further disinvestment – nothing on BPCL, nothing on Concor, or IDBI. Today we hear that there is going to be confusion when it comes to Power Grid and REC as well?
Yes. The disinvestment target this year was scaled down because of the consistent disappointment in the previous years. This year the target has been Rs 75,000-80,000 cror. Clearly, the agenda was not to get very aggressive with respect to disinvestment.

Here again, most part of the year goes without much success and it is only towards the end of the year we see some actions. But tax collections by the government, appears to be on a better footing than what was anticipated both by way of GST collection and direct taxes till now. This is something that might be easing the pressure as far as the government finances are concerned.

What is the outlook when it comes to the entire IT space? The brokerages including Goldman Sachs have downgraded some of the IT services providers. They were talking about a slowdown in dollar revenue growth, macroeconomic stress as well. Will some of these concerns continue for a prolonged period of time?
As far as IT is concerned definitely there is a concern over slowdown. A decisive step that has been taken by the US Fed and other central banks in the context of disproportionate rise in inflation. They are tightening the screws as far as inflation management is concerned. So clearly there is going to be a slowdown as far as US corporates are concerned.

The PMIs in the US have been coming off and most of the policy makers are talking about a shallow recession out there. What analysts are doing is accommodating that in their scenarios. The other thing is that from a valuation standpoint, because the valuation had come down quite a bit from the multiples 12 months back, Now there is a sea change. From something like a 35 times price to earnings ratio, for large companies, it has come down to 24-25 times.

But pre-Covid level is about 18 odd times or lesser than that and so there was a gap out there and we have a sort of a scenario which is not that great as far as the outlook is concerned.

After Q1 results, most analysts have downgraded earnings by roughly about 8% to 9% for FY23. As a result, everything has culminated into a reverse value versus earnings outlook for the IT space. This is going to be a correction in the IT pack. From a longer term standpoint, once a capitulation happens, it will create value but we need to wait for the right valuation before getting very bullish about the sector.