IT stocks earnings upgrades fail to turn analysts’ pessimism on the sector into optimism

Several IT stocks received a slew of brokerage rating upgrades over the last three months.

The Dalal Street remained volatile in May, with the stream of corporate India’s Q4 FY24 financial results announcements, and uncertainty amid the ongoing voting for the general election. Now, with the election results out of the way, and the new government taking oath under the third term of Prime Minister Narendra Modi, the markets seem to have found a new vigour.

The BSE Sensex made a new all-time high on Friday, 7 June, while NSE Nifty was just inches away from its peak. Earlier, in April, India Inc’s Q4 earnings, which were mostly in line with Street estimates, were not able to provide a meaningful positive trigger to the indices to rally further at these high valuations.

The fiscal fourth quarter earnings brought some cheer to the battered information technology stocks, with several of those receiving a slew of brokerage rating upgrades over the last three months. Despite a challenging quarter marked by muted demand and weak discretionary spending, IT stocks such as Tech Mahindra, LTIMindtree, HCL Tech, and TCS have seen a surge in rating upgrades. Some analysts say that IT stocks may have reached their valuation nadir and are now poised for a rebound.

However, that is not enough to turn the pessimism on the sector into an overall optimism, with several brokerages still cautious on IT shares, showed Moneycontrol’s monthly Analyst Call Tracker. Even with the brokerage rating upgrades trickling in over the last three months (March through May), IT stocks such as Wipro, Tech Mahindra and LTIMindtree continue to prominently feature on the list of stocks with maximum pessimism -- each stock having a high proportion of bearish calls.

On the other hand, the list of stocks with maximum optimism (highest proportion of bullish calls), continues to be dominated by banking, finance and insurance firms, such as HDFC Bank, ICICI Bank, HDFC Life and SBI Life. Notably, the newest entrant in the Nifty 50 index -- Shriram Finance -- now sits atop the maximum optimism list, with 36 ‘buy’ calls, and only 1 ‘hold’ and ‘sell’ call each. Analysts are optimistic about banks’ robust credit growth, supported by healthy, well-capitalised balance sheets.

Auto manufacturers were among those that have faced maximum downgrades over the last three months, after having run up in the past one year, with analysts in doubt if those have any steam left. This is despite the robust financial performance in the January-March fiscal quarter.

Brokerages say it will be difficult for auto companies to continue growing sales at the same pace and maintain profitability, given intense competition and expansion into margin dilutive businesses. Furher, valuation concerns may not justify the optimistic projections based on past performance.

For instance, Maruti Suzuki is facing muted volume growth and increased competition, leading to significant downgrades in their stock recommendations. Similarly, Tata Motors, despite a stellar year-over-year profit increase, faces scepticism over the sustainability of its growth, particularly concerning the expensive shift towards electric vehicles.

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