CLSA downgrades TCS, HCL to ‘sell’ on weak sector outlook

The 2024 growth outlook for the IT sector remains weak at best, even as it has not reflected the valuations since November, as Nifty IT is up 23 per cent and outperforming Nifty by 10 percentage points, according to brokerage and investment group CLSA.

The brokerage has downgraded TCS and HCL Tech from “underperform” to

“sell” and has reiterated the “sell” on Wipro and LTI Mindtree. The nonreflection of valuations is primarily due to the softening of the US 10year bond yield by 50 basis points, improving demand commentary by hyperscalers and the hype around GenAI with Nvidia reporting betterthanexpected results and guidance. The percolating impact of these tailwinds, however, fail to reflect in various IT service companies’ (Cognizant, Capgemini, Genpact,

EPAM and Globant) CY 24 revenue growth guidance and the growth outlook for banking, retail and telecom verticals.

Even the 2024 ordering activity outlooks from Information Services Group and Gartner IT Services Forecast are reminiscent of CY2019 trends and the Nifty IT’s valuation is 28 times its annual expected earnings.

CLSA also noted that the 2024 outlook for banking, retail and telecom verticals is not very different from 2023 and the banking sector technology spend direction for the year still remains uncertain.

NEGATIVE CATALYST

In telecom, the overall capex intensity in CY24/25 is largely flat, per Bloomberg consensus 2024 guidance from global IT service companies does not exude confidence. CLSA believes midsingle digit revenue growth guidance by HCL Tech and Infosys in April 2024 would be a negative catalyst for TCS, HCL and Wipro.