JP Morgan downgrades Indian IT sector: Check outlook on TCS, Wipro, Infosys and HCL Tech

JP Morgan downgrades Indian IT sector

Brokerage firm JP Morgan has downgraded the Indian IT service sector to 'UNDERWEIGHT' and has cut the target price between 10 and 20%. Let us look for the reason and the target price.

Reason for the lower rating for the Indian IT sector

As per the brokerage firm, the Indian IT sector was continuously growing till Q3FY22 but has begun to slow down from Q4FY22. It is likely to worsen into FY23 for many reasons - tougher competition, supply issues, and eventually a worsening macro. It added that the rising margin headwinds in the near term and revenue headwinds in the medium term from a potential macro slowdown will mean that the sector’s earnings upgrade cycle is behind.

The EBIT margins are trending down from inflation. The bottom-up outlook remains positive from most Services, Software, and SaaS names YTD, and the tech spending cycle remains buoyant structurally. The firm believes there are more downside risks to current earnings assumptions.

Indian IT sector Companies - Downgraded

JP Morgan has downgraded Tata Consultancy Services (TCS), HCL Technology, Wipro, and L&T Technology to UNDERWEIGHT from NEUTRAL and cut its target price by 15-21%.

Indian IT sector Companies - Overweight

JP Morgan has an OVERWEIGHT call on Infosys thanks to growth, Tech Mahindra for 5G cycle and margin expansion, Mphasis, and Persistent System due to more defensive industry exposure and stronger growth outlook.

While industry margins are expected to be narrow because of a talent war that has pushed up costs of hiring and retaining employees, Infosys' margin reset is early and gives it bandwidth to invest and maintain growth.

CompaniesCurrent Target Price (Rs)Previous Target Price (Rs)
HCL Tech9501,150
L&T Tech3,2004,500

The Nifty IT Index has underperformed the NIFTY by 15% YTD as the earnings outlook has worsened over the current earnings season.