IT Stocks Decline on Valuation Concerns and Anticipated Muted Earnings Growth

IT Stocks Decline on Valuation Concerns and Anticipated Muted Earnings Growth

VoM News Desk | January 3, 2024 | 12:21 PM IST | Breaking News | Follow on Google News

IT Stocks Decline on Valuation Concerns and Anticipated Muted Earnings Growth

IT Stocks Decline on Valuation Concerns and Anticipated Muted Earnings Growth

On Wednesday, leading IT stocks, including Tata Consultancy Services (TCS), Infosys, and Wipro, witnessed a decline of more than 2%, contributing to a 2.2% fall in the Nifty IT index, marking it as the biggest loser among Nifty indices.

The downturn across all constituents of the Nifty IT index, such as Mphasis, Coforge, LTIMindtree, Wipro, and Tech Mahindra, is attributed to concerns over high valuations and the anticipation of subdued earnings growth for the fiscal third quarter ending December 2023.

Analysts at JM Financial foresee modest returns from Indian IT services companies in 2024. They anticipate a potentially weaker FY24 exit and cautious initial FY25 guidance, suggesting a potential better entry point for investors post Q4 results. The brokerage firm believes mid-cap companies with growth momentum will likely outperform large caps despite their high valuations.

Jefferies, while remaining selective on the IT sector due to elevated sector valuations amid limited demand recovery, expects soft aggregate revenue growth of 0.8% QoQ in constant currency terms for Q3FY24. They predict margin expansion, particularly for Tech Mahindra and Coforge, but margin contractions of 80-120 bps for Wipro and Infosys due to wage hikes.

The brokerage firm’s recent interactions with management and Accenture’s results don’t indicate a ground recovery for IT firms. They suggest caution, highlighting that historically, entering NiftyIT at current levels has led to underperformance against Nifty. Jefferies recommends only buying Infosys and Coforge at this time.

Nuvama Institutional Equities expects a soft Q3FY24 for IT companies due to seasonality, fewer working days, and increased furloughs. They estimate revenue growth between -4% and +4%, attributed to lower discretionary tech spends, delayed deal executions, and furloughs.

Despite near-term headwinds, Nuvama Equities remains positive about the IT sector’s medium to long-term growth potential, expecting a strong revenue recovery in the forthcoming quarters. They anticipate companies retaining their FY24 guidance, with attention shifting towards FY25/26 and client budget insights.

Note: Investors are advised to consult certified experts before making investment decisions, considering the diverse perspectives and recommendations provided by individual analysts or broking companies.

VoM News Desk

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