Large-cap IT companies have been languishing in analysts’ pessimism list since 2022. A year later, the picture remains unchanged.
What started with two names has grown to four – Wipro, Tata Consultancy Services, Tech Mahindra and HCL Tech. The Street wasn’t expecting any fireworks from large-cap IT companies but the Q4 numbers were rather underwhelming. After the poor show, the stocks have cemented their positions further in the list.
Data available with Bloomberg showed that these four IT names have higher Sell and Hold calls than Buys. Though Infosys does not feature among the top 10 names in the Maximum Pessimism list, it too has seen a fair number of downgrades after forecasting the slowest revenue growth rate in six years of 4-7 percent.
Also Read: TCS, Infosys, HCL Tech record 65% decline in hiring as IT sector runs into a rough patch
“Worsening outlook of top clients of IT services companies point to further pressures for Indian IT firms. This has started to reflect in the revenue growth figures of IT firms in Q4 FY23, slightly ahead of the imminent US recession,” according to analysts at Jefferies.
Weakness in communications and BFSI verticals and higher scrutiny on discretionary IT spends are the key reasons keeping investors as well as mutual fund managers away from the sector.
Two-wheeler firms slide
Apart from the IT sector, two names from the auto segment – Hero MotoCorp and Bajaj Auto – have also made it to the ‘Maximum Pessimism’ list. Slow recovery in rural demand for two-wheelers, declining exports, particularly Nigeria nightmare for Bajaj Auto, and inconsistent trend in bottom line have kept analysts on the edge.
As of April end, Hero MotoCorp had 12 Hold calls, 9 Sell calls and 26 Buy calls. Bajaj Auto had 17 Hold calls, 4 Sell calls and 27 Buy calls. Despite Hero MotoCorp beating Street estimates with Q4 results last week, no significant upgrades have trickled in for the stock. Only a turnaround in rural demand led by a good rabi harvest season, cooling of inflationary pressures in export markets and an EV strategy can change analysts’ minds.
Meanwhile, in absolute terms, JSW Steel and Divi’s Laboratories remained the top two names in the Maximum Pessimism list due to high valuations, with 17 and 10 Sell calls respectively.
Optimism list
A short seller’s scathing report released earlier this year has had no effect on analysts’ optimism for Adani Ports. With 20 Buy calls and nil Hold or Sell calls, the stock boasts of an optimism score of 100.
Also Read: CLSA has 'buy' rating on Adani Ports, raises target price to Rs 790
In April, Adani Ports announced the acquisition of Karaikal Port Private Limited for Rs 1,485 crore under India’s bankruptcy law. With the takeover, its portfolio has now grown to 14 ports in India. The company has also adjusted its ambitious capital expenditure plans till FY25 to conserve cash, which is being liked by analysts.
Goldman Sachs recently reaffirmed its Buy rating on Adani Ports, with a target price of Rs 810. CLSA, too, has given a Buy rating and raised the target price to Rs 790 from Rs 700. Similarly, Morgan Stanley has an Overweight stance on the company's stock and has set a target price of Rs 690.
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Financial firms stay put
Like the script remains unchanged for IT stocks, so is the case for financials. Out of the 10 stocks that analysts were most optimistic about in April, 5 came from the financial space. This has been the case since November last year. State Bank of India, SBI Life Insurance Co, ICICI Bank, Housing Development Finance Corp and HDFC Bank to continue enjoy optimism scores ranging from 96 to 100.
Profits of the 26 Nifty companies that have declared Q4 results so far have risen 10 percent year on year, fuelled by financials. Excluding financials, profits would have declined 1 percent year on year, according to Motilal Oswal Financial Services.
With faster repricing of deposits, there was a fear of banks’ net interest margins contracting but all big private banks have managed to expand their margins in Q4 as well. Along with that, sustained momentum in disbursements and stable asset quality continue to be the tailwinds for the BFSI firms, analysts said.
On May 5, HDFC and HDFC Bank took a sharp knock after Morgan Stanley Capital International (MSCI) said the merged entity’s weighting will go down in the index. While it could lead to outflows of $150-200 million, analysts believe it is just a technical overhang while the fundamentals remain intact.
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