Goldman cuts ratings on TCS, Infosys and Tech Mahindra

Mumbai: Goldman Sachs has downgraded its ratings on TCS, Infosys and Tech Mahindra to 'sell' citing a sharp cut in dollar revenue growth forecast for the IT sector.

The brokerage said the high share valuation of Information Technology (IT) companies do not factor in a 'material' revenue growth slowdown in FY24. It however upgraded Wipro from 'sell' to 'buy'.

"Given the upcoming macro slowdown (not recession), which is percolating down multiple leading demand indicators, we believe Indian IT sector's dollar revenue growth will start to materially slow down from here, weighing on the secular tailwinds," said Goldman in a note to clients. The brokerage has retained its 'buy' rating on Mphasis and a neutral on HCL Technologies.

IT stocks slumped on Wednesday with the NSE IT index dropping 3.36% to 28,137.60. The benchmark Nifty fell 0.4% but managed to close above the psychologically crucial 18,000-mark. Higher-than-expected inflation reading in the US for August spooked sentiment as investors fretted that the US Federal Reserve might have to raise interest rates more aggressively to tamp down inflation, which is feared to result in a more prolonged slowdown.

Infosys shares slumped 4.5%, TCS dropped 3.2%, Tech Mahindra fell 3.1% and Wipro declined 1.3%.

"We acknowledge that Indian IT services is a defensive industry where, during sharp slowdowns, it is a big beneficiary of customers' cost optimization agendas along with vendor consolidation for larger IT services players," said Goldman's analysts. "While this remains a key risk to our sell rating on both Infy and TCS in particular, we believe a slowdown in discretionary IT services spend around the growth and transformation agenda will be quite material and something not yet completely reflected in the street's double-digit revenue growth forecast for the industry for FY24E."