Long winter ahead for IT stocks, Tech Mahindra most vulnerable: JM Financial

The Indian IT services landscape, on the whole, has left investors disappointed, brokerage firm JM Financial said underlining that Tech Mahindra appears to be the most vulnerable. Wipro, according to it, is the best placed.

“Revenue growth moderation is likely to weigh on the sector's valuation. Barring Wipro (-38% PER correction TTM), we see limited re-rating potential. We assume coverage of the sector with a ‘buy’ rating on Wipro, ‘hold’ on Infosys, HCL Tech and TCS (in order of relative preference) and ‘sell’ on Tech Mahindra,” JM Financial said.

The Nifty IT index is the worst performing sectoral index so far in calendar year 2022. On the counter, the worst performer year-to-date, Wipro, gave a negative return of nearly 45%.

“The demand for digital/cloud services, which seemed impregnable just a few quarters back, has started to cool off. Caution has crept into hyperscalers and SaaS players’ outlook. Our checks suggest pessimism is highest in the UK, with almost all large deals off the table. Though an EU crisis can trigger another wave of offshoring, as it did in 2012, we see limited incremental share gains for Indian IT vendors,” the brokerage said.

“Revenue estimates of SaaS players have only now started to get cut as Covid-led tailwinds held up demand thus far. Estimates for Indian IT Services, though moderated, leave scope for disappointment, in our view,” it added.

Wipro is best placed in terms of resilience (least exposure to stressed verticals), expectations (pessimism built in given highest cuts to FY24E USD revenue growth) and valuation comfort (lowest premium to past 5-year median), the brokerage firm said.

Besides, new leadership, backed by Chairman Rishad Premji, is ringing in changes that are clear positives for the long-term, it added.

JM Financial has a ‘buy’ rating on Wipro with a target price of Rs 480, which implies an upside potential of 24% from the current market price of Rs 394 per share.

“Tech Mahindra’s low score on our proprietary metrics, along with a perpetual work-in-progress on margins, make us wary of any turnaround or re-rating potential in the near term,” JM Financial said. It has a ‘sell’ rating on Tech Mahindra with a target price of Rs 970, which implies a downside of 6% from the current market price of Rs 1,033 per share.

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