JP Morgan has downgraded 2 IT players; here is why

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April 21, 2023
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The weakness in the IT space amid concerns over a global slowdown and in the aftermath of the bank collapse in US is beginning to tell on the entire sector. Representative Image

The March quarter earnings season has been a mixed bag for the information technology sector. Industry leaders Tata Consultancy Services (TCS) and Infosys reported weaker-than-expected numbers but smaller rivals HCL Technologies, Mastek and Cyient surprised the Street positively.

After TCS and Infosys missed the Street’s estimates on all fronts and faced the brunt of a sharp sell-off, HCL Tech topped expectations on the profit front.

Nonetheless, the weakness in the IT space amid concerns over a global slowdown and in the aftermath of the collapse of some banks in US, has begun to tell on the entire sector.

Taking note of the trend, global research and broking firm JP Morgan said in a report that the FY23 fourth quarter results of TCS, Infosys and HCL Tech highlight the weakness in banking, financial services and insurance (BFSI) and telecom verticals.

These troubled verticals, which form a sizable chunk of the business, put Q4 as well as FY24 earnings for IT majors at a risk. “We see Tech Mahindra and Mphasis get impacted, given their high exposure to both of these verticals,” the broking firm wrote in its research note.

Also read: What makes the Q4 flop show a bigger pain for Infosys than for TCS?

It has reduced Tech Mahindra’s revenue estimates for FY24/25 by 3 percent/5 percent and margin estimates by 40/60 basis points (bps), driving a reduction of 7 percent/8 percent in earnings-per-stock estimates.

Similarly, Mphasis’ revenue estimates for FY24/25 have been cut by 6 percent/8 percent and the margin by 40/30 bps, resulting in an 8 percent/9 percent reduction in earnings-per-stock estimates for the same period.

Also read: HCLTech beats profit estimates, logs in 11% jump in Q4 net to Rs 3,981 crore

One basis point is one-hundredth of a percentage point.

JP Morgan has also downgraded its rating for Tech Mahindra and Mphasis from “neutral” to “underweight” and lowered their target prices to Rs 900 and Rs 1,550 a share, respectively.

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