Nifty IT index jumped 2% to 30,278.15 today led by MPhasis, Coforge, HCL Tech, Tech Mahindra and Infosys. Despite disappointing Q1FY24 earnings, the IT index has been rising for the last two days. The market sentiment improved after tech-heavy Nasdaq jumped over 1% for the second straight day on Thursday, as data showed the annual increase in US producer inflation figure was the smallest in nearly three years. The Nifty IT index has gained 3.5% year-to-date compared to a 7.2% jump in the Nifty 50 index. Analysts at Nirmal Bang continue to have a ‘SELL’ rating on all IT stocks. Despite having EPS estimates lower than the street, the brokerage suspects the sector could still see downsides if there is a deep recession in the US.
Consensus underestimating growth & margin risks in FY24/FY25
The Nifty IT index advanced by 83% from 31 December 2019 to 13 June 2023 while Nifty 50 was up by 52% during the same period. This massive outperformance of the Nifty IT index was on the back of pandemic-driven Digital Transformation (DT) services-based earnings acceleration and significant multiple expansion on unprecedented monetary stimulus in the US and Europe. DT high tide over the last 36 months has lifted all boats, according to Nirmal Bang. However, accelerated normalisation of monetary policy in the US raises the probability of a hard landing there and consequently a high probability of negative surprises on the fundamental side over the next 12 months. The brokerage believes that the consensus is underestimating growth and margin risks in FY24/FY25.
TCS, Infosys valuations still expensive; can at best deliver single-digit stock returns in 5 years
“Even if one were to ignore the next 12–18 months’ risks around recession and take a 5-year view, we believe that starting valuations are expensive and can at best deliver mid to high single-digit total stock returns (including dividends) for TCS and Infosys, as we believe that structural revenue/earnings growth is being overestimated by the street,” said analysts.
Wipro: SELL – Target Price: Rs 338
“We have tweaked our estimates based on 1QFY24 and the 2Q guidance leading to downward revisions to the diluted EPS for FY24-FY26. We roll forward our valuation to June 2025 while keeping our target PE multiple constant at 13.5x (30% discount to TCS), leading to a Target Price (TP) of Rs 338,” said Nirmal Bang.