IT Behemoths Like Infosys And Tech Mahindra Are Getting Unfavourable Rating From Various Brokerage Firms.

IT sector behemoths like Infosys and Tech Mahindra face the consequences of economic downturn. Recently, Tech Mahindra Ltd plunged more than 7% in the early session after brokerage entity Citi downgraded the stock to “sell” from “neutral”, lowering the target price to Rs 955 from Rs 1,100. This is due to heightened growth risks in the communications sector, which accounts for around 40% of the company’s sales. Near-term concerns exist, and a negative catalyst watch is already in place, which may be worsened by macroeconomic variables, according to the brokerage’s most recent analysis. 

Operating deleverage may result in lower margins than expected by the market. Finally, while there are benefits to leadership change, they may take some time to manifest. CP Gurnani, the MD and CEO of Tech Mahindra, will step down later this year and will be succeeded by Mohit Joshi, who comes from Infosys.

Citi stated that the valuations are at 16x 1-year forward cons EPS – the risk-reward ratio appears to be unfavourable To account for these risks, they reduced the target multiple to 15x (17x before), resulting in a revised TP of Rs 955 (Rs1100 previously). Their FY24E/FY25E EPS are 7% to 14% lower than the estimate. So far, IT businesses have had a poor March quarter. Given the growth constraints and the reintroduction of discretionary spending, the brokerage predicts additional disappointment in consensus EBIT margin expectations.

Tech Mahindra reported lower revenues from its top five clients in the third quarter due to client restructuring. Though management expects the situation to improve by the fourth quarter, the issues may linger, indicating macroeconomic uncertainty. The brokerage company also stated that issues in various sectors, such as discretionary cutbacks and deferrals, vendor consolidation, and price pressure, might hurt growth.

Tech Mahindra has identified several margin levers, including cutting subcontracting costs, selling off or closing non-strategic operations, adjusting the outsourcing mix, using automation and delivery excellence methods, and exploiting synergies with portfolio companies. The rate of margin improvement may be slower than expected due to growth problems and the possibility of discretionary expenditures returning.

Infosys and TCS reported a drop in telecom revenue in the fourth quarter, with -8 per cent constant currency (CC) QoQ and -2 per cent cc QoQ, respectively. Management statements across firms have been cautious about the telecom sector, but the headwinds appear sharper than predicted. Salil Parekh, MD & CEO of Infosys, also discussed an unforeseen ramp-down in the telecommunications industry, as well as in the hi-tech, retail, and finance industries.

Shares of Infosys began at a 52-week low at the start of the week, down the lowest in more than three years, as analysts tracking the firm either downgraded or dropped their price estimates on the stock, or both, following the company’s March quarter results shock.

A flurry of downgrades for Infosys has resulted in the company receiving the most sell recommendations since September 2017. Infosys is now rated a sell by 16.4 per cent of analysts, down from 17.5 per cent in September 2017. In the fiscal year 2024, the business anticipates constant currency sales growth of 4-7 per cent, compared to consensus projections of 6-8 per cent. In addition, the firm reported a 3.2 per cent drop in constant currency sales (adjusted for exchange rate movements), the lowest in at least a decade.

JPMorgan has downgraded Infosys to underweight and reduced its price objective by 20% to Rs 1,200 from Rs 1,500 before. The major drivers for the downgrading were an uninspired commentary and “ambitious guidance” following the margin failure. JPMorgan has reduced revenue expectations by 4-5 per cent and margin estimates by 70 basis points, resulting in an 8-9 per cent reduction in EPS estimates for the fiscal year 2024-2025. It describes its advice as “unusually second-half-heavy” and “prone to subsequent downgrades. Citi now rates Infosys as neutral, with a price objective of Rs 1,400, down from Rs 1,675.

Disclosure.

The leading IT corporations also expressed concerns about future demand due to the global economic downturn, the impact of the financial crisis on BFSI segments, and rising fears of a US recession. Let’s see how these Indian IT behemoths play their game successfully in the coming months.