CLSA cautious on IT stocks, maintains sell on four large-cap IT stocks

Shares of information technology (IT) companies continued to trade lower in Friday's session (March 15), with the Nifty IT pack down nearly 1 per cent at the time of writing this copy. Amid the weakness, eight out of the 10 Nifty IT constituents traded in negative territory. The stocks slipped as much as 2 per cent.
 
Besides, global brokerage CLSA has been cautious on the pack and has suggested a 'sell' on four of the large-cap IT stocks, namely, HCL Technologies, Wipro, TCS, and LTIMindtree.
 
The brokerage held that the demand euphoria reflected in recent hyper-scale Oracle and chip manufacturing companies' earnings call commentary failed to percolate down to IT service providers' order books or to near-term demand momentum.

Further the brokerage adds that instead the momentum around deal win announcements QTD has slowed compared to 2Q and 3Q24, Also, key verticals, like banking, retail & telecom, continue to face challenges. ''

Also, CLSA points out that the client budgeting exercises remain fluid and amid this landscape, the brokerage is of the view that this could pose downside risk to estimates & consensus for FY25 revenues.

InCred Equities in its report dated March 13, 2024 said that the sector is not yet done with large/mega deal contracting which, coupled with vendor aggression to close FY24F on a high, could lead to better deal
contracting in 4QFY24F. However, high cost of booking may exert pressure on margins.

Additionally, the brokerage that the ‘doing more for less’ noise could get louder as limited budget flexibility is leading to prioritization of projects, with clients looking at vendors to identify and optimize cost areas to release discretionary budgets. This implies cannibalization of the existing revenue from reversing automation benefits, artificial intelligence or AI tools to eliminate processes, limited pricing adjustments, etc. 

Besides, though the brokerage sees that Tier-II companies have the building blocks to sustain the growth momentum, the entry valuations are unfavourable. For Tier-I, brokerage sees valuations comfort but earnings upgrade is limited. The brokerage thus prefers restructuring stories and Tech Mahindra continues to be its preferred stock pick.