Going bullish on all tier-1 IT stocks listed in India, analysts at Macquarie said that demand remains resilient for companies such as TCS, Infosys, Wipro, HCL Technologies, and Tech Mahindra. “Unlike 2000s, India Tier-1 IT Services firms are strategic partners – not glorified staffing providers who will be the first to bear the brunt of cuts,” a report by Macquarie said. The brokerage firm has an ‘Outperform’ rating on all the above-mentioned stocks after it upgraded Wipro from the ‘Neutral’ rating. The Nifty IT index has not been favoured so far this year, falling 23% in 2022.
Demand worries overdone
Analysts at Macquarie said worries over demand are overdone, adding that channel checks indicate no change in demand, barring slight declines in worst-affected segments like home improvement. The global brokerage and research firm has also said that S&P 500 revenue and tech spending correlation will not hold this time. The report said that the correlation between S&P 500 revenue and tech spending ignores the strength of the current technology refresh cycle and how tied it is to business competitiveness, the deflationary impact of reducing hardware costs over the long term, and market share gains that continue to be made by India Tier-1 vs global peers.
This goes contrary to what Nomura had said earlier last month. Nomura had projected a potential slowdown for IT services demand in FY24 as earnings growth slows down. The brokerage firm was bullish only on Infosys and Tech Mahindra.
Changing status of Indian IT sector
Macquarie also added that times have changed for Indian Tier-1 IT companies that unlike 2000s, are strategic partners for businesses and not just glorified staffing providers who will be the first to bear the brunt of cuts. “We do not expect knee-jerk reactions from any firms as the baseline expectation is that if there is a U.S. recession, it will be mild,” the report said. “Even firms that did phenomenally well during the pandemic such as home improvement firms that are facing revenue and margin headwinds now are not expected to cut technology budgets other than through reducing travel costs, limiting the extensions granted to highly experimental projects etc. and are expected to shrink budgets by ~1%. Meanwhile, other segments such as Airlines, Hospitality and Energy are seeing technology spending improve.”
Bullish on IT stocks
Analysts were already bullish on other leading IT stocks but have now upgraded Wipro to outperform as well. “Our pecking order over the next 12 months changes to HCL Tech > TCS > Infosys > Wipro > Tech Mahindra (from earlier TCS > HCL Tech > Infosys > TechM > Wipro) as we upgrade Wipro to outperform and think HCL Technologies is poised to narrow the discount with Infosys and TCS as concerns recede …” they said.
–Infosys target price: Rs 2,140
–TCS target price: Rs 4,420
–HCL Technologies: Rs 1,440
–Wipro: Rs 660
–Tech Mahindra: Rs 1,730