Despite the string of earnings disappointments from IT services firms, Nasscom has said there is no change in the 10-12% growth target it has set for fiscal year 2017. But double-digit growth looks unlikely this year, at least for the listed universe.

According to an analyst with a multinational brokerage firm, if Nasscom’s target has to be achieved, it will require strong growth from the unlisted universe and captive outsourcing arms of overseas companies.

Infosys Ltd, which was expected to lead top-tier firms in terms of growth in FY17, has cut its growth target to between 10.5% and 12%. Analysts were expecting firms such as Tata Consultancy Services Ltd and Wipro Ltd to grow in single digits anyway; but the outlook has worsened since the June quarter. Each of these firms reported sluggish growth in the key US market and in the important BFSI (banking, financial services and insurance) segment. This was despite the fact that the June quarter is typically a strong one for these segments. It will be a tall order for these firms to catch up in the remaining quarters, especially considering that the December and March quarters are seasonally weak.

Analysts at Nomura Research point out in a note to clients that when Cognizant Technology Solutions Corp. reports numbers on 5 August, it could well cut its guidance. As things stand, revenues are expected to grow by 10-13%; this guidance can be cut to as low as 9-11%, analysts say. After all, the company has a high exposure to both the US market and the BFSI segment, where growth has been sluggish. Besides, demand has been hit in the healthcare industry, owing to mergers and acquisitions. The BFSI and healthcare segments together account for around 70% of total revenues of Cognizant.

Nomura’s calculations suggest that the company requires record revenue addition in June, September and December quarters to achieve double-digit growth this year. This is a tall order, to say the least, in the current environment, as well as keeping in mind the struggles in the company’s top two verticals.

To think that Cognizant has been the top-performing company in terms of growth in recent years, it will certainly be a tall order to expect the industry to grow in double digits.

There is a slim chance that higher growth in captive outsourcing units may prop up industry growth numbers. But even if they do, it’s nothing for investors in IT stocks to get excited about. If anything, loss of market share to captives should be seen as another overhang in the sector.

IT stocks, meanwhile, have done fairly well in the past two weeks. Despite the weak June quarter results, the Nifty IT index is down by just 0.2% during this period, while the Nifty index has risen by about 1%.

Of course, the fact that IT stocks have hardly participated in the rally since the budget has meant that valuations have corrected relative to the market. But relative to growth expectations, valuations have risen. Investors should be wary.

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