Foreign brokerage HSBC believes IT stocks are likely heading towards a prolonged period of consolidation and range-bound returns. This, it fears, will be similar to 2014-2018, when the IT index offered mid-single-digit returns compounded annually. The consolidation phase then was driven by stagnating single-digit top-line over the same period.
After the recent stock run-up, the foreign brokerage downgraded Persistent Systems to ‘Hold’. HSBC said it acknowledges Persistent Systems’ strong engineering capabilities, but the growth differential with other companies will decline next year, thereby challenging expensive valuations.
“We adjust estimates across our coverage, increase target prices for Wipro, LTIMindtree and Coforge, and lower our target price for KPIT Technologies. We continue to prefer CTSH, TCS, and Coforge. Infosys’s business pick-up vs TCS creditworthy, but valuations have now almost converged.
HSBC said the September quarter is unlikely to change the earnings trajectory for the sector, as while demand is improving, it is not beating existing estimates.
There are some green shoots in Banking and TMT demand, while weakness is emerging in areas such as automobiles verticals.
The highlight of the quarter will again be Infosys FY25 revenue growth guidance, which is likely to get upgraded by 50bps to 3.5-4.5 per cent, while HCL Technologies’ FY25 guidance is likely to be maintained at 3-5 per cent. Wipro’s Q3 guidance is unlikely to show much improvement against recent trends.
“Read-across from Accenture’s guidance for FY25 was neutral to slightly positive for Indian IT. The company offered FY25 guidance of 0-3 per cent (organic cc terms), which is an acceleration from -1 per cent in FY24. Also, bookings for the company were up 21 per cent in 4QFY24 (c1 per cent for consulting and c42 per cent for outsourcing).
The focus will remain on macro recovery in light of recent rate cuts in the US. Commentaries about the 2025 demand outlook will be critical.
“GCCs continue to gain share in the overall spend. Comments on the GCC cycle could be useful. GenAI will be the focus again, with some companies like HCLT likely alluding to sharp productivity improvement. The adoption curve of GenAI will be important to understand as well from the 2Q result commentaries.
Company specific issues, such as the UK slowdown for TCS, auto demand commentary from KPIT, deal-to-revenue conversion for Infosys, growth outlook from high levels for PSYS, margin normalization for TechM, and business recovery update for Wipro will be key observables.
