Pakistan Technology: IT Exports in Dec-22 up 6% MoM; Uptick led by Software Services

Pakistan’s Information Technology (IT) exports for December 2022 increased by 6% MoM due to a 13% MoM increase in Computer Services. Among Computer Services, Software Consultancy and Export of Software increased by 14% and 28% MoM respectively.

IT export number, however, declined 2% YoY to US$246mn due to 3% YoY decline in Computer services.

December 2022 exports have recorded close to the US$250mn mark after April 2022, however, are still down from monthly peak of US$260mn recorded in March 2022.

On a broader level slowdown is being witnessed since April 2022, with YoY growth averaging 3% in May-Dec 22 compared to average 26% YoY growth in prior eight month period of Sep 21 to Apr 22.

Slowdown in IT exports are mainly indicative of a global slowdown in IT spending and higher gap between interbank and open market exchange rate. In its latest report, Gartner (Technology Research and Consulting firm) has revised down its growth forecast of IT spending to 2.4% in 2023 from earlier 5.1%.

IT Ministry of Pakistan has set a export target of US$5bn for FY23. Current fiscal year monthly average run rate of US$222mn indicates that Pakistan will be missing the export target by a big margin.

In 1HFY23, IT exports are up by 2% YoY to US$1.33bn. Slight growth has been seen due to 3% YoY growth in Computer Services to US$1.06bn.

As of December 2022, TTM (Trailing Twelve Months) IT exports have increased by 8% YoY to US$2.65bn as compared to 43% YoY growth in December 2021.

According to IT industry experts, the sector is still growing near the levels of its 5-year CAGR (20%). The growth is not being reflected due to the current three tiered FX market rate prevalent in the economy.

Despite the slowdown in growth, IT exports as a % of total exports of the country have reached 8.3%. This is compared to 6.9% in Dec-21 and 8.0% in Nov-22. In 1HFY23 IT exports as a % of total exports stand at 7.5% compared to 7.0% in 1HFY22.

Segment wise breakdown for the month of December 2022 indicates that Telecom Services declined by 19% MoM and were flat YoY to stand at US$45.4mn and Computer Services increased by 13% MoM and declined by 3% YoY to reach US$200.3mn.

The total share of Telecom/Computer Services exports for December 2022 stood at 18%/81% respectively compared to almost same share in December 2021.

In 1HFY23 Telecom/Computer share of exports stand at 20%/80% compared to 20/79% share in 1HFY22. This is because Computer Services exports have increased by 3% YoY in 1HFY23 driven by 11% growth in Export of Software and 6% in Software Consultancy.

Growth of IT companies and training of IT professionals have led to rise in share of Computer services. This value addition is leading to higher Net Exports of the sector since Computer Services exports are mostly human resource driven.

Net IT Exports (Exports-Imports) during 1HFY23 have increased by 20% YoY to US$1.17bn compared to 2% YoY growth in overall IT exports for the same period.

Net Exports on TTM basis as of Dec-22 also have grown by 19% YoY to US$2.2bn. Nov-22 monthly number has increased by 32% YoY to US$231mn.

Better performance of Software related services among IT exports, is positive for Systems Limited (SYS) which is our top pick in the IT sector. SYS currently trades at a 2023 PE of 13.9x and PS of 3.0x.

Courtesy- Topline Securities

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