Analyst Call Tracker: Pessimism in IT continues; AI can redeem IT stocks but not soon enough

In a recent report, Kotak Securities said that most enterprises are focused on cost reduction; moreover, trends do not indicate the possibility of recovery in discretionary spending in 1HCY24

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IT companies, especially large ones such as TCS, Infosys and Wipro, face weak demand outlook due to cost cutting initiatives taken by clients western nations. Analysts expect the challenging macroeconomic conditions to persist, resulting in muted demand across key verticals.

However, they said that IT firms are looking to invest in high tech initiatives like AI, although the benefits of these spending are expected to materialise once the macro conditions improve.

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Moneycontrol’s Analyst Call Tracker showed that large-cap IT firms including TCS, Infosys, LTI Mindtree, Tech Mahindra, and Wipro, have seen maximum pessimism, with these stocks featuring in the list of top 10 with maximum ‘sell’ calls among Nifty 50 companies. Elara Capital said, “Q2 witnessed Tier 1 IT companies posting their slowest YoY growth in the past 12 quarters.”

In a recent report, Kotak Securities said that most enterprises are focused on cost reduction; moreover, trends do not indicate the possibility of recovery in discretionary spending in 1HCY24. Elara Capital said major verticals like BFSI, retail and manufacturing continue to be in a slump.

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Q3 outlook cautious for Indian IT companies

Q3 outlook is cautious for the Indian IT industry, with many companies slashing the revenue growth target and guidance.

“Wipro has announced a weak target of (-3.5)-1.5 percent (revenue growth) for Q3FY24 while Infosys also reduced FY24 target 1.0-2.5 percent. HCL Technologies also reduced FY24 target from 6-8 percent CC to 5-6 percent CC,” Elara Capital noted. But there is a possibility of margin expansion due to absence of wage hikes and improving attrition and utilisation rates.

Kotak said a weak April-June quarter next year can lead to a 1-2 percent cut in revenue and EPS estimate for FY2025. “An uptick in deal conversions in 1HCY24 is required to provide a better safety net on FY2025E growth projections,” Kotak added in their note.

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However, analysts note that companies with investments planned in areas like generative AI, and Engineering R&D can be considered to invest in.

Infosys and HCL Tech are Kotak Securities’ picks in this area, as these companies have “healthy growth characteristics, ability to cater to both discretionary spending and cost take-out programs and trade at reasonable valuations”.

Elara Capital has picked LTI Mindtree for investments in generative AI. Cyient, KPIT Technologies are also noted for investments in ER&D. “ER&D continues to post strong results on the back of momentum in transportation, led by passenger cars. KPIT Technologies was the prime beneficiary with 100 percent exposure to the transportation vertical (8.4 percent QoQ USD growth). Cyient also performed well with 4.7 percent growth,” Elara Capital said.