Meanwhile, domestic brokerage firm Nirmal Bang Equities, too, has slashed both target PE multiples as well as FY24 earnings estimate for the sector amid margin concerns. The brokerage firm believes that the pain it had anticipated for the sector will likely be felt earlier on both valuation as well as earnings. The deterioration of the US corporate sector profitability would lead to tighter IT spending, and is playing out earlier than anticipated.
Among the individual stocks, Infosys, Tech Mahindra, Wipro, Larsen & Toubro (L&T) Infotech, Coforge, Mphasis, L&T Technology Services and Mindtree dropped in the range of 5.3 per cent to 8 per cent on the National Stock Exchange (NSE). Tata Consultancy Services and HCL Technologies, meanwhile, fell 4 per cent and 5 per cent respectively. In comparison, the Nifty50 index was quoted 2.4 per cent lower at 15,850 points at 01:41 PM.
Earlier on April 18, 2022, the Nifty IT index had dipped 5.1 per cent in the intra-day trade after Infosys had reported a weak set of numbers for the quarter ended March 2022 (Q4FY22). Thus far in the current financial year 2022-23 (FY23), the IT index has tanked 21 per cent, as compared to a 9 per cent decline in the Nifty50 index.
"At this point, while we believe that Digital Transformation (DT) services will continue to remain a key theme for the next several years, we believe that ‘willingness-to-spend’ will be constrained by ‘ability-to-spend’ as enterprise customers battle earnings pressures," Girish Pai, head of research at Nirmal Bang Equities said in a IT sector report.
The brokerage firm believes that consensus is underestimating margin risks in FY23 and demand risks in 2HFY23/FY24.
"We therefore continue to be negative on the IT sector on an absolute basis. The relative call is more complicated. We favor Tier-1 companies vs. Tier-2. Beyond FY23, we see customers shifting from current democratic ‘skills/capability’ focused vendor model to a more discriminating one based on the ‘ability-to-deliver’ cost take outs, business model changes - in that order," it added.
The brokerage has cut target prices by 15-25 per cent across its coverage universe (from our already reduced levels in April 2022) due to both targets PE multiple reduction (impact of 10 per cent) and earnings cut.
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