Tier-2 IT firms face sharper downgrades with clients likely to pare spends

Margin pressure and valuation premium point to downside for stocks

Long-term investors in the IT industry are bracing for potential downgrades. Although there should be good growth through the next 6-12 months, the industry may be over-valued, especially the second tier.

There are headwinds that could lead to tighter margins and lower long-term demand. Customers across industries may pare IT budgets as commodity inflation, wage inflation (in the US), tighter monetary conditions and reduced consumption reduce their own revenue growth. The expected growth in 2022-23 may already be priced in, while a likely slowdown and downside risks in 2023-24 may not be reflected.

These negatives could mean valuation downgrades for