Is the Indian IT rally overdone? Two brokerages sound a word of caution on Infosys, TCS and peers

Ambit also wrote that the ask rates for tier-2 companies to achieve the financial year 2025 growth rates are between 2.7% and 3.9% CQGR, which are in line or above the five-year average CQGR, excluding financial year 2022.

At current prices, the valuation of tier-1 and tier-2 companies are at a 36% and 101% premium respectively to their pre-Covid averages, Ambit wrote.

On the other hand, Jefferies also met the management of seven Indian IT companies and mentioned that based on their interaction with them, the demand outlook still remains uncertain.

The brokerage further mentioned that the budgets for the calendar year 2024 may be revised lower, which may become a threat to achieving the consensus growth target of 7.7% for the financial year 2025.

Increasing revenue leakage and deeper furloughs in the December quarter suggest that the near-term growth outlook remains weak. With no clear improvement in demand and rich valuations of the sector, the brokerage chose to remain selective on Indian IT stocks.

Infosys and Coforge are the only two IT companies on which Jefferies has a "buy" recommendation.

The Nifty IT index has risen 6% over the last three months with all stocks barring Wipro and Tech Mahindra delivering positive returns between 3% to as high as 33% (Persistent Systems).

For 2023, the index is up over 13% and Infosys is the only stock with negative returns for the year so far.