CLSA downgrades TCS, HCLT; Nifty IT sheds 5% from 52-week high in February

Shares of IT companies took a beating on Tuesday, dragging equity markets, after global brokerage CLSA reportedly downgraded IT largecaps TCS and HCLTech, saying the sector's outlook in 2024 remains weak, which is not being reflected in the current valuations. 

The Nifty IT index was the leading sectoral loser in Tuesday's trade, down nearly 2 per cent at its intra-day low of 36,613. With this, the index has shed 5 per cent from its 52-week high of 38,560 reached on Feb 19. 

The weakness over the last few weeks follows a hotter-than-expected surprise increase in US consumer prices last month, which has pushed back hopes of Fed rate cuts to June this year against early bets of March.  

In Tuesday's trade, TCS, Infosys, Wipro fell 1-2 per cent intra-day. Persistent Systems, Mphasis, Coforge were other top losers from midcaps, down 2 per cent each. 

As per reports, CLSA has downgraded TCS and HCLTech to 'sell' from 'underperform', while leaving the target prices unchanged at Rs 3,925 and Rs 1,536, respectively. It has further reiterated 'sell' ratings on Wipro and LTIMindtree. 

CLSA reportedly said it sees more downside risk to its FY25 earnings estimates for IT companies, even as the stocks have posted a handsome rally in the last 11 months on hopes of a turaround in the coming fiscal led by US Fed rate cuts.  

So far in FY24, the Nifty IT index has rallied 30 per cent, in line with a 29 per cent rise in the Nifty benchmark. Among stocks, Persistent Systems led the gains with a sharp surge of 84 per cent in this period, followed by L&T Tech, Coforge and HCLTech that have risen 51-69 per cent. 

Wipro, TCS, Tech Mahindra and Infosys have gained 15-42 per cent so far in FY24.

As per Trendlyne, the NiftyIT index current PE basis 1-year trailing EPS is 32 times, above the 5-year average of 27 times.

Despite the rally however, analysts at CLSA maintain a contrarion view as they believe the outlook for IT sector's key clients/verticals has not changed much from last year. 

"Banking, retail, telecom, which are the key verticals for most of the Indian IT companies, their outlook for 2024 is not very different from 2023", read the note. 

Further, the brokerage noted that the top-down approach to IT services demand outlook is reminiscent of 2019 and the 2024 guidance from global IT companies like Cognizant, Capgemini, Genpact, EPAM and Globant does not exude confidence.

It expects a mid-single-digit revenue growth guidance by HCLTech and Infosys in April 2024, which will be a negative catalyst for TCS, HCLTech and Wipro.