Indian IT stocks have underperformed the benchmark Nifty by 15% in year-to-date (YTD) terms as the earnings outlook has worsened over the current earnings season. Global brokerage JPMorgan sees peak revenue growth behind and EBIT margins trending down from inflation, mean reversion.
“While the bottom-up outlook remains positive from most Services, Software and SaaS names YTD, and the tech spending cycle remains buoyant structurally, we feel there are more downside risks to current earnings assumptions,” the brokerage said in a note.
This leads JPMorgan to downgrade its IT sector stance to Underweight and target multiples by 10-20% driving Tata Consultancy Services (TCS), HCL Tech, Wipro, L&T Tech Services to Underweight from Neutral stance.
Rising margin headwinds in the near term and revenue headwinds in the medium term from a potential macro slowdown will mean that the sector’s earnings upgrade cycle is behind, as per JPM.
Indian IT growth was accelerating till Q322 and has begun to slow down from 4Q22, which is likely to worsen into FY23 from tougher comps, supply issues and eventually a worsening macro.
“Indian IT stocks are the most expensive services names globally at a premium to digital native peers and Accenture, and at par with enterprise software that appears unsustainable. Sector reverse DCFs suggest that the market is still baking in 6-13% growth for Tier 1s and 14-33% for midcaps over the next decade that seems optimistic given this remains a late cyclical sector for most names,” it added.
Though, JPMorgan’s top overweight is Infosys thanks to growth, Tech Mahindra for 5G cycle and margin expansion, Mphasis and Persistant Systems (PSYS) thanks to more defensive industry exposure and stronger growth outlook.
The views and recommendations made above are those of individual analysts or broking companies, and not of Mint.
