‘Peak growth behind us’: JP Morgan cuts outlook for IT sector to ‘Underweight’; continues to bet on Infosys

“While the bottom-up outlook remains positive from most Services, Software and SaaS names YTD, and the tech spending cycle remains buoyant structurally, we feel there are more downside risks to current earnings assumptions,” JP Morgan said in a note.

IT sector, JP Morgan
Analysts at JP Morgan have cut their outlook of India's IT (Information Technology) sector to 'Underweight' and said it sees "peak revenue growth behind us".

Analysts at JP Morgan have cut their outlook of India’s IT (Information Technology) sector to ‘Underweight’ and said it sees “peak revenue growth behind us”. JP Morgan cited decelerating growth, high inflation and macro slowdown arising from war in Ukraine as the reasons behind the downgrade. Indian IT sector growth was accelerating till the third quarter of 2022 and has begun to slow down from the fourth quarter, analysts said, highlighting that the IT boom witnessed in the last two years appears to dim amid global supply chain shortages. 

Indian Tech Services have underperformed the NIFTY by 15 per cent year-to-date as the earnings outlook has worsened over the current earnings season, the US-based equity research firm said in a note. IT sector indice, Nifty IT, has underperformed the benchmark Nifty 50 year-to-date. Nifty IT is down nearly 26 per cent year-to-date while Nifty 50 is down 8 per cent so far this year.

Indian Tech Services most expensive services names globally

“With peak sector growth behind, growth deceleration should continue to weigh on sector multiples,” the note said. “While the bottom-up outlook remains positive from most Services, Software and SaaS names YTD, and the tech spending cycle remains buoyant structurally, we feel there are more downside risks to current earnings assumptions,” it added. JP Morgan also said Indian Tech Services are the most expensive services names globally at a premium to digital native peers, and at par with enterprise software that appears unsustainable.

TCS, HCL Technologies, Wipro downgraded

In terms of the companies, sectoral downgrade has led to downgrade of sector multiples such as  Tata Consultancy Services, HCL Technologies, Wipro and L&T Technology Services to ‘underweight’ from Neutral, JP Morgan analysts, said, citing slowing down of growth ahead of pre-COVID levels. 

Infosys, Mphasis, Persistent Systems and Tech Mahindra: Continue to be OW

However, analysts continue to be ‘overweight’ on stocks such as Infosys, Mphasis, Persistent Systems and Tech Mahindra. “Our top OW is Infosys thanks to growth, TechM for 5G cycle and margin expansion, Mphasis and PSYS thanks to more defensive industry exposure and stronger growth outlook,” according to the JP Morgan note published Thursday.

“This earnings cycle witnessed overwhelmingly more margin-led earnings misses than beats that drove downgrades to estimates for most stocks (except companies like TCS). We expect margin headwinds to drive downgrades in 1Q/2Q earnings seasons, and macro-led revenue downgrades in 3Q/4Q, that make even current multiples unsustainable for some,” JP Morgan analysts said.

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