All the constituents of Nifty IT index were trading in the red with Mphasis, Coforge, LTIMindtree, Wipro and Tech Mahindra being the top contributors to the downward movement.
IT stocks traded lower on Wednesday with the heavyweights Tata Consultancy Services (TCS), Infosys, Wipro among other shares declining more than 2% each. The Nifty IT index was down 2.2%, emerging as the biggest loser among Nifty indices.
All the constituents of Nifty IT index were trading in the red with Mphasis, Coforge, LTIMindtree, Wipro and Tech Mahindra being the top contributors to the downward movement.
Weakness in IT stocks can be attributed to concerns over high valuations and expectations of muted earnings growth for the fiscal third quarter ended December 2023. This market sentiment reflects a cautious approach by investors amid these concerns.
Analysts at JM Financial expect the Indian IT services companies to give modest returns in 2024.
“A likely weaker FY24 exit and potentially lower than expected initial FY25 guidance could offer investors better entry point post Q4 results. We believe mid-caps with growth momentum will continue to out-perform large caps despite heady valuations," JM Financial said.
Jefferies remains selective on the IT sector given rich sector valuations amidst limited demand recovery.
The foreign brokerage expects aggregate revenue growth during Q3FY24 to be soft at 0.8% quarter-on-quarter (QoQ) in constant currency (CC) terms, with HCL Technologies and LTIMindtree leading on growth.
Focus on margins should drive aggregate margin expansion of 30 bps QoQ, with strong 330bps and 280 bps expansion for Tech Mahindra and Coforge but 80-120 bps margin contraction for Wipro and Infosys due to wage hikes, Jefferies said.
Jefferies’ recent management interactions and Accenture’s recent results do not indicate a recovery on the ground for IT firms.
“We thus believe that NiftyIT's 31% premium to Nifty looks rich given that, over the past 15 years, entering NiftyIT at these levels has led to underperformance vs Nifty. We thus remain selective with Buys only on Infosys and Coforge," said the brokerage firm.
Nuvama Institutional Equities expects Q3FY24 to be a soft quarter for IT companies due to seasonality of fewer working days and higher furloughs. It estimates revenue growth to be between -4% and +4% for most companies – dragged by lower discretionary tech spends, delay in execution of deals and furloughs.
“Deal flow shall continue to be stable — which should translate to a strong revenue recovery in coming quarters, in our view. We expect most companies to retain their FY24 guidance. Focus shall now shift from FY24 to FY25/26, with keen interest in how client budgets are shaping up for CY24, especially after recent Fed commentary," Nuvama Equities said.
However, it stays positive in the IT sector as it believes medium to long term growth potential outweighs near-term headwinds.
