Analyst Call Tracker: Caution continues for IT stocks despite recent upgrades

Wipro, Tech Mahindra and HCLTech continue to dominate the list of Nifty 50 stocks with maximum pessimism.

Analysts continue to remain cautious about information technology stocks despite some seeing green shoots of recovery for the sector ahead of the Q1 earnings season. As a result, three information technology majors—Wipro, Tech Mahindra, and HCLTech—continue to hold a place on the list of Nifty 50 stocks receiving maximum pessimism from analysts.

According to Moneycontrol's Analyst Call Tracker, Wipro tops the list of stocks with the highest "sell" calls or maximum pessimism. A total of 23 brokerages have a 'sell' call on the stock, while 13 gave it a 'hold' rating, and only nine rolled out a 'buy' recommendation. This is despite CLSA's recent double upgrade on the stock to 'outperform,' an equivalent to a 'buy' call.

Tech Mahindra is another IT major that commands high pessimism, with 24 out of the 46 brokerages covering the stock assigning it either a 'sell' or a 'hold' rating. The Street's stance on HCLTech is similar, with the stock facing 22 'sell' or 'hold' calls compared to 21 'buy' ratings.

Recovery still some time away

IT companies have faced a challenging year as businesses in the US, a key market, tightened spending, causing delays in deal conversions for domestic players. Even though a respite is likely to come for the sector towards the end of the current fiscal year, it is still some time away.

“A weak exit to FY24 and a still inconducive demand environment could temper initial FY25 guidance for most players,” JM Financial said in a recent note.

While the street hopes for a pick-up in discretionary spending through FY25, channel checks and recent peer commentaries suggest no immediate recovery, Axis Securities said. This could potentially lead to some near-term consensus cuts, it added.

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Even though analysts at Nomura believe Q1 FY25 will mark the bottom of sluggish revenue growth for the Indian IT services sector, they still feel that a strong recovery in discretionary demand may take a few quarters. However, a glimmer of hope arises from the fact that the brokerage does not see things worsening for the sector hereon.

Regardless of the fact that Nomura has shifted from a 'negative' to 'neutral' stance on the sector, it still remains cautious about turning bullish on Indian IT majors.

Uncertainty over rate cuts

While investors across the globe are hoping to see the Federal Reserve deliver the first rate cut in September, underlying caution on the same still prevails. Analysts also believe that a tight macro environment in the US would delay a recovery for domestic IT players, and hence the US central bank's rate action will remain crucial for the sector.

Along with that, analysts also remain watchful of management's commentaries after the Q1 results, to gauge the course of recovery for the IT sector. Management commentaries for major IT companies were not so positive in the previous quarter, further evoking caution among brokerages. Hence, this time around, brokerages would want to see some optimism from the management before shifting their stance on the sector.

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