scorecardresearchAfter JPMorgan, Nomura downgrades Indian IT firms; sees revenue growth

After JPMorgan, Nomura downgrades Indian IT firms; sees revenue growth decelerating

Updated: 26 May 2022, 11:55 AM IST
TL;DR.

While Nomura expects growth rates in the Indian IT sector in the financial year 2022-23 to be strong with double-digit revenue growth, but uncertainty on the same continuing in the financial year 2023-24 is extremely high.

While Nomura expects growth rates in the Indian IT sector in the financial year 2022-23 to be strong with double-digit revenue growth, but uncertainty on the same continuing in the financial year 2023-24 is extremely high.

While Nomura expects growth rates in the Indian IT sector in the financial year 2022-23 to be strong with double-digit revenue growth, but uncertainty on the same continuing in the financial year 2023-24 is extremely high.

Global brokerage house Nomura has downgraded several major IT firms as it sees revenue growth decelerating going ahead. This is the second downgrade for the Indian IT sector after JP Morgan slashed the target prices of many IT companies last week citing risks to their earnings expectations.

While the brokerage expects growth rates in the Indian IT sector in the financial year 2022-23 to be strong with double-digit revenue growth, but uncertainty on the same continuing in the financial year 2023-24 is extremely high, it noted.

"Fast-changing macroeconomic conditions, hawkish Fed stance to tame inflation through continued interest rate hikes and profit warnings by corporates across the globe seem to suggest tough days are ahead for tech spending," stated Nomura.

The brokerage downgraded Tata Consultancy Services and L&T Infotech to 'reduce' from 'neutral'. It also reduced the ratings of Wipro, HCL Technologies and Persistent Systems to 'neutral' from 'buy'.

Meanwhile, Infosys and Tech Mahindra are the only tech stocks with a 'buy' rating from Nomura in the IT sector.

Let's take a look at the new ratings and target prices by Nomura

CompanyRatingReduced Target Price (Rs)Upside/Downside (%)
TCSDowngrade to Reduce 2,950-11
InfosysBuy1,72017
WiproDowngrade to Neutral4905
HCL TechDowngrade to Neutral1,1008
Tech MahindraBuy1,35018
L&T InfotechDowngrade to Reduce3,690-11
MindtreeNeutral2,830-5
MphasisNeutral2,5200
Persistent SystemsDowngrade to Neutral4,17010

IT stocks have been witnessing a correction with frontline stocks declining up to 42 percent from their all-time highs. Tech Mahindra has tanked the most, down 42 percent from its all-time high of 1,838, hit on December 30, 2021.

Meanwhile, Wipro has also shed around 40 percent from its all-time high of 740, hit on October 14, 2021. HCL Tech, Infosys and TCS have also lost over 20 percent each from their respective all-time highs. In comparison, Nifty IT has also declined over 30 percent from its all-time high.

Nomura sees more headwinds for the sector in the near term than tailwinds, notwithstanding the depreciation in the rupee. The brokerage said volatility in capital markets and rising interest rates had impacted liquidity for startup companies across the globe.

"Enterprises' willingness to spend on digital transformation will continue, but growth rates on spends are likely to decelerate constrained by revenue and earnings volatility," noted the brokerage.

The demand for tech talent may also slow down in the coming quarters due to hiring freezes and an increase in firing in order to save capital, said Nomura. This could lead to a material fall in attrition in the financial year 2023-24, it added.

Overall, it expects the EBIT margins of the companies in its coverage universe to fall 30-110 bps in FY23, before rising by 10-160 bp in FY24.

"We lower our FY23-24F EPS by 0-5 percent for our coverage universe, mainly driven by slowing revenue growth. Our FY23-24F EPS are 2-3 percent lower than the street for large caps. In our pessimistic scenario (growth reverting to pre-COVID level) and assuming no margin improvement in FY24F, we see 16 percent downside in large caps from current levels," it stated.

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First Published: 26 May 2022, 11:55 AM IST