Despite muted expectations, the September earnings season of Indian IT companies did not get off to a good start. India's biggest IT outsourcer Tata Consultancy Services (TCS) disappointed by reporting just 0.3 per cent sequential growth in dollar revenues to $4,374 million.
Though Infosys reported a better-than-estimated dollar revenue of $2,587 million in Q2, the Bengaluru-based outsourcer lowered its revenue growth guidance for the second time in three months, disappointing investors. (Read: Infosys cuts revenue guidance again)
Commenting on quarterly earnings reports from Infosys and TCS, Sharekhan associate vice president Sanjeev Hota said the pain in IT sector is unlikely to go away soon and is likely to stay for one and a half years.
"The issue (lower growth) is likely to stay for next one and a half years," Mr Hota said. (Watch)
"TCS is still witnessing pain in BFSI sector, its largest sector in terms of revenue contribution. They are also witnessing pressure in the retail sector, which is one of the biggest sectors for TCS," he added.
Mr Hota said the problem with the IT sector is not cyclical, rather it is structural and is likely to stay for next two to three years. "Every time the IT sector goes through a transition phase it takes 2-3 year to revive," he added.
Frontline IT stocks have underperformed the broader indices over last six months. Infosys shares have fallen 12 per cent, while TCS shares corrected more than 6 per cent in last six months, compared to an 8 per cent gain in the broader Sensex.
Mr Hota said he remains cautious on IT stocks at the current juncture despite their valuations falling to attractive levels.
"It will be difficult to get a market outperformer from IT sector in next 8-12 months given the kind of muted growth they are going to deliver in FY17 and the visibility is still not there for FY18," Mr Hota added.
"There are also uncertainties over Brexit and US elections," he added.
However, Mr Hota is positive on Persistent Systems in the midcap IT space. "Persistent Systems derives nearly 50-60 per cent of its revenue from digital segment. It can surprise on the revenue and margin fronts," he added.
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