Analyst Call Tracker: Pain continues for IT stocks

IT stocks see maximum 'sell' calls

The list of top companies with highest "sell" calls or maximum pessimism is dominated by information technology (IT) names, including India’s largest IT services firm Tata Consultancy, HCL Tech, and Wipro.

Four large IT firms are among the top 10 stocks with maximum “sell” calls — same as the previous quarter. A year ago, the list had three large IT players.

The Nifty IT index jumped about 28 percent in FY24. The benchmark Nifty clocked similar gains.

No immediate recovery in sight

IT companies have had a weak year as business tightened spending in the US, one of the biggest markets for Indian companies. A respite looks unlikely.

Four of the 10 stocks with most analyst 'sell' calls are from the IT sector.

“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.

HDFC Institutional Equities research expects IT companies’ March quarter revenue growth to be divergent — in a -7 percent to 6 percent range.

“The slowdown in macro is still a baseline scenario and lower discretionary spending and slower conversion from TCV (total contract value) to revenue is a feature and not a bug,” HDFC Securities Institutional Equities analysts have said.

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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 will likely drive some near-term consensus cuts, it added.

Frontline IT companies’ guidance may fail to excite the markets. Cost optimisation is still imperative, Axis Securities said, adding, “We expect the companies to guide for flat-to-higher margins for FY25, given their continued focus on operational efficiencies.”

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Margins face headwinds, deal execution should be the focus

Rupee appreciation and muted top-line will weigh on margins and incremental margin expansion will likely be difficult in the absence of growth, JM Financial said.

Focus shall now shift to execution of deals won in the last three quarters. “Deal flows are likely to hold firm despite a volatile demand environment,” Nuvama Research said.

A few players such as TCS, Coforge and L&T Technology Services are likely to report strong deal flow in the March quarter, it added.

However, it is not all gloom and doom. A few analysts see the growth being bottomed out. The IT sector growth is expected to recover gradually in FY25E, HDFC Institutional Research said.

Valuation concerns may keep investors on the sidelines. “Valuation restricts a significant upside case in the near term,” it said. The average valuation of IT companies in HDFC research coverage was at 24.6x FY26E earnings. This is about 10 percent higher than the 5-year average and 35 percent higher than the 10-year average.

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