CLSA says ‘sell’ these IT stocks — Here are the reasons for the cautious stance

In its latest brokerage note, CLSA said the momentum around deal win announcements quarter-to-date has slowed compared to the July to September and October to December 2023 quarters.

The brokerage took examples of Oracle and chip manufacturing companies and noted that the enthusiasm shown for the IT services market situation in their earnings call commentary failed to show up in their order books.

It is of the opinion that key industry verticals like banking, retail and telecom continue to face challenges. The brokerage also thinks that due to an uncertain macro and still-high interest rates, client budgeting exercises remain fluid for the IT sector.

CLSA believes this could pose a downside risk to estimate and consensus for FY25 revenue growth.

Another IT sector research analyst Apurva Prasad at HDFC Securities also has a similar opinion. Earlier this week, he told CNBC-TV18 that as value migration happens from the big seven, the remainder of the S&P 500 on generative AI, the role of Indian IT companies increases dramatically. That's what is creating opportunities.

However, the trajectory or the gradient of improvement is only going to be very gradual so he expects normalisation of growth rates for the sector over the next three to four quarters. “Having said that there is also scope for margins to recover. So, that's essentially what we are looking at. We remain selective out here because valuations are constraining,” he said.

HDFC Securities on March 13 suggested ‘reducing’ Wipro and Tech Mahindra while it recommended ‘adding’ LTIMindtree. It is also positive on Persistent Systems and BirlaSoft and believes that TCS’ outperformance compared to Infosys would continue on growth the next year as well.