Shares of Infosys, TCS, Mindtree, Mphasis along with most other IT stocks were trading in the red, a day after JP Morgan downgraded its rating on all tech stocks in its portfolio citing continued margin pressure. However, Macquarie is bullish on the Indian IT sector.
IT giants including Infosys, Wipro, and Tata Consultancy Services (TCS) have been making headlines for reducing or delaying variable payouts. Even as shrinking margins have remained a top concern for tech firms, global brokerage firm Macquarie is bullish on the Indian IT sector but investors on Dalal Street continued to be cautious on Wednesday.
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Shares of Infosys, TCS, Mindtree, Mphasis along with most other IT stocks were trading in the red, a day after JP Morgan downgraded its rating on all tech stocks in its portfolio from ‘overweight’ to ‘neutral’ citing continued margin pressure.
However, Macquarie’s overweight stance on the sector seemed to have offered some respite as the fall in IT stocks today isn’t as steep as the last session.
Here’s how IT stocks were faring close to noon deals
The downtrend, largely prevalent across the sector, comes even as Macquarie, in its latest report, has said, “We continue to recommend an outperform stance on India IT Services, as we see little downside to revenue and margin estimates and see more tailwinds than headwinds to margins from here.”
HCL Tech is the brokerage’s top pick, followed by TCS and Infosys. It expects an almost 50 percent upside HCL Tech’s stock and 26 percent and 21 percent upside, respectively, in the latter two.
|Rating||Target Price||Rating||Target Price|
|TCS||Underweight||Rs 2,800||Outperform||Rs 4,150|
|HCL Tech||Underweight||Rs 8,00||Outperform||Rs 1,420|
|Infosys||Neutral||Rs 1,600||Outperform||Rs 1,870|
|Tech Mahindra||Nuetral||Rs 1,1100|
|Persistent Systems||Neutral||Rs 3,900|
|Tata Elxsi||Underweight||Rs 3,900|
Macquarie pointed out that the Naukri job index for IT-Software for July 2022 was up 7 percent year-on-year, indicating that hiring activity in the sector is still up YoY, but this was a moderation vs the 10 percent YoY seen in June 2022.
“While we could see a slight bump up for some firms where wage hikes are coming later, we believe in aggregate the worst of the lateral wage pressure is behind us and that attrition in absolute numbers has peaked,” the brokerage said.
However, Ankur Rudra, India telecom & IT research analyst, JPMorgan is of the view that there is significant downside risk for IT companies and margin pressures could lead to earnings decline.
“Valuations not baking, in our view. The kind of margin pressures, which will have an impact on estimates, especially the earnings estimates, we think there are significant downside risks to earnings estimates, given the margin pressures we have seen so far, are likely to persist, at least in the medium term,” he told CNBC-TV18.
Rudra also said that companies are having to give a lot more wage increases, especially onsite wage hikes a lot higher this time, at least two times the increase that the industry is used to paying for the last 30 years, which is further compounding the margin pressures at the moment.