IT stocks, including Tata Consultancy Services (TCS), Infosys, and Wipro, witnessed a decline of over 2% each in Wednesday's trading. The Nifty IT index, down 2.2%, emerged as the largest loser among Nifty indices.
All components of the Nifty IT index were in negative territory, with Mphasis, Coforge, LTIMindtree, Wipro, and Tech Mahindra being the primary contributors to the downward trend.
The dip in IT stocks can be attributed to concerns about high valuations and expectations of subdued earnings growth for the fiscal third quarter ending December 2023. This reflects a cautious stance by investors amid these apprehensions.
JM Financial noted, "A likely weaker FY24 exit and potentially lower than expected initial FY25 guidance could offer investors a better entry point post Q4 results. We believe mid-caps with growth momentum will continue to outperform large caps despite heady valuations."
Jefferies remains selective on the IT sector due to rich sector valuations amid limited demand recovery. The foreign brokerage anticipates soft aggregate revenue growth during Q3FY24 at 0.8% quarter-on-quarter (QoQ) in constant currency (CC) terms, with HCL Technologies and LTIMindtree leading in growth.
Jefferies suggests that margins' focus should drive a 30 bps QoQ aggregate margin expansion, with significant expansion for Tech Mahindra and Coforge but a margin contraction for Wipro and Infosys due to wage hikes.
Despite stable deal flow, Jefferies' recent management interactions and Accenture's results indicate no ground recovery for IT firms. The brokerage deems NiftyIT's 31% premium to Nifty as rich and remains selective with Buys only on Infosys and Coforge.
Nuvama Institutional Equities expects Q3FY24 to be a soft quarter for IT companies due to seasonality, estimating revenue growth between -4% and +4% for most companies.
While Nuvama stays positive in the IT sector, acknowledging near-term headwinds, it believes the medium to long-term growth potential outweighs them.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies. We advise investors to check with certified experts before taking any investment decisions.
