India’s largest information technology firms Tata Consultancy Services and Infosys saw maximum brokerage analyst upgrades among Nifty stocks during the last one quarter, driven by expectations of the US Federal Reserve shift towards interest rate cuts.
Analysts have upgraded these select IT stocks despite the expectations of continued weakness in IT firms' earnings in the fourth quarter.
The number of ‘buy’ calls on Infosys stock jumped from 20 to 31 at the end of March, after the stock fell 3.5% in the last fiscal quarter (January-March) to Rs 1,498. 'Hold' and 'sell' calls on Infosys stock fell to 8 and 7 respectively.
TCS stock gained 3% in Q4 to Rs 3,876, with the number of 'buy' calls increasing from 22 to 26. 'Hold' and 'sell' calls now stand at 10 each, down from 12 and 10 last quarter.
Dark clouds over IT sector, but with a silver lining
Despite the overall bullish market trend in 2023, the IT sector has lagged due to a challenging macro environment, including prolonged deal conversions and reduced IT spending as businesses scaled down.
However, optimism surrounds the potential success of the US central bank in orchestrating a smooth economic cooldown and indications of an earlier-than-anticipated initiation of the interest rate reduction cycle, suggesting a more favourable macroeconomic landscape for the sector.
Q4 Earnings: IT sector pain likely to continue
Analysts foresee improved global economy and strong deal wins leading to the IT sector revenue growth acceleration in 2024-25. But, despite this, some anticipate a weak start to the new financial year. Indian IT companies are expected to report weak earnings for the fiscal fourth quarter (January-March) due to subdued demand and cautious client behaviour.
Analysts suggest the Indian IT industry isn't expecting good news in Q4 2023-24. Research firm Emkay Global Financial Services predicts continued subpar growth in Q4, attributing it to weak discretionary spending.
All eyes on guidance
All eyes will be on guidance in the upcoming January-March quarterly results. CLSA said in a recent note that IT firms are likely to offer conservative guidance ahead, maintaining their outlook for key verticals such as banking, retail, hi-tech, and telecom.
IT stocks weakened after Accenture recently slashed its full-year revenue growth guidance from 2-5 percent to 1-3 percent, and dealt a blow to hopes of a recovery in the sector in 2024-25.
IIFL Securities sees limited near-term upside in IT stocks given elevated valuations, 15% above the last decade's average. The firm’s analysts anticipate disappointing demand momentum reflecting in muted growth guidance for the upcoming results season.
Q4FY24 earnings are projected to be subdued with 1% QoQ CC revenue growth, lacking clear signs of discretionary demand pickup. EBIT margins are expected to expand by 40bps QoQ due to favourable supply side and weak hiring, resulting in wage deflation. Deal wins are likely to focus on cost reductions, which is insufficient to boost near-term growth, according to IIFL Securities.
TCS is expected to lead in constant currency sequential growth among large Indian IT firms, while Infosys is also anticipated to experience strong growth, driven by planned large deal ramp-ups for Q1FY25.
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