inflation: can inflation derail the history of computing? Apurva Prasad responds

“We are looking for companies where there is very strong growth visibility. Among IT large caps, they are top tier companies and mid-tier companies, or one,” says Apurva PrasadVP-Institutional Research, Securities.

Can inflation derail the history of IT and is this also going to have a huge impact on customer spending that we are going to see in the future?
Yes, it has already started to play out. From the service provider’s point of view, it’s more on the supply side. These are some of the challenges that most companies have been facing in any case for many quarters. So what was more of an offshore-centric talent shortage also appears to be spreading more to onshore geographies as well. This wage inflation environment is likely to continue, although we understand that it has faded from recent highs.

I think that would be the base case and it should continue for the next two or three quarters or so. It is also an indicator of demand because we are talking about the sustainability of strong growth. Keep in mind that there is longevity in demand and a propensity to grow for longer. It hasn’t really changed.

While some of the risks associated with the macro environment may be worsening, they are most evident in the increased cost of equity that has driven this correction. From a demand perspective, most of the major clients or companies have given a fair amount of confidence in terms of the tax expenditure trajectory that these numbers are not under threat.

We saw margin misfires on all but maybe one counter. In the future, what would be your game? Many advertise that it could be Infosys for growth story, Mphasis as defensive game or for 5G game?
Interestingly, if we just look at how it plays out, the correction in equities has been a function of the downgrade that has occurred and, in fact, on a cumulative basis or for a period slightly longer than that, the rise in earnings does not s is not really produced.

Back to recommendation stories

It can be argued that the income leveling rate has leveled off, but the estimates have actually been zero. There were few downgrades. If I look at some of the mid tiers, even on a YTD basis, more single digit upgrades are on the way. This really supports this strong demand which is expected to continue. We see pockets where some of the challenges can get much bigger, but the kind of bookings that most of these companies have had is that a lot of those bookings are short-term deals. This gives good short-term visibility

We are therefore looking for companies where there is very strong growth visibility and where structural diversity remains strong. This is the cut we are looking for. If I have to name a few actions, we should probably take a few. Infosys and HCL Tech from top tier and mid-tier companies, we like Persistent Systems or an Mphasis.

Valuations aside, is it fair to compare the kind of fall and crash we’ve seen in tech stocks on the Nasdaq with Indian IT?
Although the correlation is not very great, they are obviously comparable. The comparables are more in global IT services. The correlation is much higher if we look at the broader basket of the S&P 500. One of the things we’ve seen historically is a scenario of slowing growth, whether it’s US GDP or the S&P 500, many of whom are end customers.

The growth premium enjoyed by mid-tiers compared to tier I IT or largecap is tending to fall and this is quite strongly correlated. But yes, there has been a valuation that has been correlated to the Nasdaq in the past, but it’s more correlated to the S&P 500. There have been cuts in the recent past, but we’ll be watching how that progresses.

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