No respite for TCS, Infosys & other IT firms in near term, Citi sticks to 'sell' calls

Despite continuous substantial deal wins exceeding $10 billion in the last three quarters, TCS' existing business clients are reevaluating spending, potentially neutralising the benefits of these deals, said Citi after interacting with the company's management

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The Nifty IT index rallied more than 7 percent in the previous week on hopes of expected interest rate cuts in 2024 spurring discretionary demand and large deals. While that maybe in distant future, the near-term outlook for Indian IT companies remains weak.

Foreign banking giant Citi has reiterated its “sell” or “neutral” calls on all the IT stocks that are part of the Nifty50 pack, as they go through a seasonally weak quarter and due to low visibility of large projects.

Other than Infosys and HCL Tech, which have a “neutral” call, Citi has a “sell” rating for all other Nifty IT stocks

At 9:30 am, Nifty IT was trading at 35,749, down 0.09 percent from the previous close.

On TCS

Citi has a target of Rs 3,170 a share, while the current market price is Rs 3,860.

Despite continuous substantial deal wins —exceeding $10 billion in the last three quarters — existing business clients are reevaluating spending, potentially neutralising the benefits of these deals, Citi said after interacting with the company's management.

The company is experiencing normal seasonality in the third quarter, with furloughs aligning with historical patterns.

Furlough is a temporary pause in work where employees retain their job but are not paid for a specified period. Furloughs have been high because of weak demand environment — there are not enough projects for employees to work on, so they are “benched”.

The third quarter is seasonally weak because of fewer working days due to the holiday season in the West.

Also Read: IT, pharma likely to be biggest beneficiaries of FII inflows. Here's why

On Infosys

Citi's target price for Infosys is Rs 1,565 a share, while the current market price is Rs 1,567. “Clients are looking to optimise costs, which is visible in the mega deals that are announced. Telecom, hi-tech, retail and financial Services including capital markets, investment banking and cards, are some of the challenged verticals," analysts at Citi said.

On Wipro

Citi has a target of Rs 360 a share, while Wipro’s current market price is Rs 446. Insights gleaned from a CFO meeting suggest that there's been no significant alteration in the visibility for December quarter compared to the start of the quarter, Citi said.

Furloughs are intensifying notably in the BFSI and tech sectors. Discretionary spends are being curtailed and the expected replenishment of large transformational projects is not materialising.

"Additionally, the company doesn't plan campus hiring for the upcoming year unless the demand environment undergoes substantial changes," Citi said.

On Tech Mahindra

Citi's target for Tech Mahindra Rs 1,000, while current market price is Rs 1,305. Insights from the CFO meeting indicate a strategic focus on six regions, including the US, Europe, Asia (excluding India), and India itself, Citi analysts said.

"Emphasis is placed on top accounts, with plans for dedicated delivery for the top 30 accounts and a structured approach for the subsequent 50 accounts. Further hiring, particularly the Chief People Officer, is expected by January 2024," the bank said in its recent report.

Also Read: Odd ones out: Only 2 Nifty indices haven't touched lifetime highs this year

On HCL Tech

Citi's target is Rs 1,295 a share against the current market price of Rs 1,483. The absence of budget flush and increased furloughs compared to previous years poses challenges in predicting demand improvement for HCL Tech. "Furloughs are higher than any of the previous two years," Citi said.

The company's medium-term growth outlook remains at a low double-digit.

Also Read: Sugar stocks get sweeter, surge up to 8% as India reverses ban on sugarcane juice to make ethanol

On LTIMindtree

Citi's target is Rs 4,660 a share, while the current market price is Rs 6,087.20. The year 2023 has been marked by cautiousness among clients, particularly in terms of budget allocation, LTIMindtree’s management told Citi. Despite substantial investments by global capability centres, there seems to be no tangible impact on the company's performance.

Disclaimer: The views and investment tips expressed by investment experts, broking houses or rating agencies on Moneycontrol are their own, and not those of the website or its management. Moneycontrol advises users to check with certified experts before taking any investment decisions.