Oasis in the Trade Sandstorm: Indian Tech Stocks?
Indian tech stocks have recently rebounded, but it may be a "false prosperity" under the impact of tariffs. The trade war has increased the risk of earnings downgrades for software service exporters, as their sales rely on the U.S. market. The performance of the four major IT export companies fell short of expectations, with TCS and Wipro both indicating cautious customer spending. Analysts warn that global uncertainty and weak U.S. demand may lead to earnings forecast downgrades, affecting the overall earnings expectations for the Nifty index. Morgan Stanley has also lowered its earnings growth forecast for the BSE Sensex index
Despite the recent strong rebound of Indian tech stocks, this may be a "false prosperity" under the impact of tariffs.
According to Bloomberg, the trade war is increasing the risk of earnings downgrades for Indian software service exporters. These companies, as a barometer of the Indian economy, rely on the U.S. market for 30%-60% of their sales, while investors continue to push up their stock prices, seemingly ignoring the potential risks.
The latest quarterly financial reports show that the performance of India's four major IT exporters is mixed and generally below analysts' expectations.
Asia's largest software exporter, Tata Consultancy Services, stated that they have observed delays in decision-making and that discretionary budgets are under more scrutiny; Wipro also indicated that due to Trump's tariff policies exacerbating concerns about a U.S. economic recession, clients have become cautious in their spending.
Bleak Earnings Outlook, Valuation Premium Hard to Sustain
It is reported that the Indian tech sector accounts for 11% of the NSE Nifty 50 index, second only to the financial sector, including giants like TCS, Infosys, and HCL Technologies.
According to Nomura strategist Saion Mukherjee, due to global uncertainty and weak U.S. demand, earnings forecasts for the IT services industry may be downgraded. Nomura warns that this poses a downside risk to the overall earnings expectations for the Nifty index.
Additionally, Morgan Stanley earlier this month also downgraded its earnings growth forecast for the benchmark BSE Sensex index for this fiscal year by nearly six percentage points to 13%, citing global concerns.
Relevant data shows that since the first quarter earnings season, the 12-month forward earnings per share estimate for the NSE Nifty IT index has declined by 1%.
Strategists from Nomura, Morgan Stanley, and IIFL Securities have also warned in recent weeks that other sectors (including commodities, pharmaceuticals, and financial services) are also facing the risk of earnings downgrades.
Dhiraj Agarwal, Managing Director of Ambit Investment Advisors, warned:
"The likelihood of earnings downgrades in the coming months is very high. Ultimately, the current 12%-13% earnings growth for Nifty will drop to single digits."
Another layer of risk lies in the valuation premium.
Citi pointed out that the Nifty IT index is currently trading at over 22 times one-year forward earnings, while the broader Nifty index is close to 20 times. The bank believes that given the risks, this valuation premium is hard to justify.
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