US bank collapses to hit Indian IT companies severely

The banking woes in the US may impact some of India's biggest IT and IteS (Information Technology Enabled Services) firms. Majors such as Tata Consultancy Services (TCS), Infosys, Wipro, HCL Tech have exposure to regional banks in the US that are facing liquidity pressure and depositors' wrath. Banking and Financial services are the largest industry vertical for Indian IT services companies contributing almost 30% to revenues, as per leading international brokerage house Bernstein.

In the last three weeks, three regional banks namely Silicon Valley Bank, Signature Bank (New York) and Silvergate Bank went bust while the fourth bank First Republic was rescued by a $30 billion infusion by 11 large US banks. Due to heavy withdrawal by depositors, these banks were forced to sell long dated bonds at a loss that immensely damaged their balance sheet.

In a recent report Bernstein notes that the recent financial sector weakness has brought stock volatility and risk to FY24 growth outlook. Macro headwinds combined with liquidity issues of banks are likely to further soften the tech spending environment, the report states.

The brokerage house reduced growth estimates across its coverage and downgraded Wipro to ‘underperform’ on weaker growth outlook and highest exposure to BFSI. It also downgraded LTTS where growth impact will be higher, driven by vendor consolidation (billion dollar playbook) while valuations remain premium. Infosys is the top pick of Bernstein.

Kotak Institutional Equities in a recent report states that current woes in the banking sector may impact sequential growth by 1% to 2% in Q1 of FY24. The note further states that its current growth forecast stood at 8% which may be cut short by 1% to 2% due to the current crisis.

JP Morgan in a recent note estimates that SVB exposure is 10 basis points to 20 basis points for TCS, Infosys and L&T Mindtree that may lead to a provision in Q4 of FY 23. The International brokerage house remains underweight on the sector as it expects revenue and earnings growth in FY24/FY25 to disappoint due to higher expectations and peak multiples.