JP Morgan says every IT services firm will disappoint in Q1; Infosys, TCS on Negative Catalyst Watch

JP Morgan on Indian IT sector: Shares of most IT services companies were under pressure on Wednesday after foreign brokerage JP Morgan reiterated its negative stance on the entire IT services universe. The brokerage said it expects every IT firm to disappoint the street in Q1 and H2FY24. Further, it has placed Infosys, TCS, and Mphasis on 'Negative Catalyst Watch', as reported by Zee Business.

The brokerage has maintained an 'underweight' rating on Infosys with a target price of Rs 1,150. On TCS, too, JP Morgan is underweight and has set the target price at Rs 2,700. As regards Mphasis, the target price is set at Rs 1,550. That's an 18 per cent decline from the previous close of Rs 1,898. Moreover, it has downgraded Persistent Systems to underweight from neutral and cut the target to Rs 4,100 from Rs 4,200 earlier. The brokerage said it finds the stock expensive given slowing growth in a tough macro environment. 

The brokerage mentioned that EPAM recently cut its guidance from +3% growth in CY23 to -2% and the cuts were led by a cut in discretionary digital engineering spending. Persistent Systems has the highest exposure to discretionary spending at 83 per cent as compared to peers' 40-75 per cent. Further, it has maintained an underweight stance on Tech Mahindra, but the target price has been raised to Rs 950 from Rs 900 earlier.

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At the time of writing this news, the S&P BSE Information Technology index was trading nearly half a per cent lower at 29,087.66 levels. KPIT Tech was the biggest loser on the index (down nearly 5 per cent). Persistent Systems was next on the list with a 2.62 per cent loss. Cigniti, Ramco Systems, LTI Mindtree, and Mastek were also among the losers. However, the stocks trimmed their losses later. At close, the IT index stood at 29,174.47, down 0.17 per cent.

Nirmal Bang Securities is also cautious about the sector. In its latest report, the brokerage said it continues to remain cautious on the IT sector with an 'underweight' (UW) stance and "will wait for better valuations or evidence that the worst is behind us. Only capitulation by the US consumer would, in our view, signal that we are close to the end of the current cycle of pain."

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The brokerage further said, "Management commentary/data points across global IT services players and cloud/SaaS players in the June 2023 quarter-to-date (QTD) as well as from the recent meetings we have had in Bengaluru with a few Tier-1 players suggest that the June 2023 quarter is likely to be weak for Tier-1 players as has been widely expected. The situation for Tier-2 players will be much more company-specific."