Emkay Global in its latest note said IT stocks’ earnings downgrade may bottom out in H1FY25, if the current expectations on interest rate cut materialise. It said the recent correction in IT stocks have made valuations more reasonable, adding that its preference is for large caps such as Infosys Ltd, HCL Technologies Ltd and Wipro Ltd over midcaps, considering relative valuation.
Emkay Global said the disappointing FY25 guidance reflects muted demand with weak discretionary spending, and lack of demand recovery visibility in the near term. The management commentary, it said, remained unchanged with recovery timelines still uncertain and recovery hopes pushed back to 2025/2026.
Infosys has guided for revenue growth of 1-3 per cent constant currency (CC) growth in FY25 (implying CQGR of 1.1-1.9 per cent), suggesting that discretionary spending remains weak as seen in H2FY24. It expects the normal seasonality to play out in FY25 per its guidance, i.e. H1 to be stronger than H2.
HCL Tech guided for 3-5 per cent CC revenue growth in FY25 (implying CQGR of -0.1 per cent to 0.6 per cent). The FY25 revenue growth guidance came weaker than expected, factoring muted growth in H1, and no material improvement in discretionary spending.
After a weak start in Q1, HCL Tech’s guidance implies a 1-2.5 per cent CQGR over Q2-Q4 to reach the FY25 growth guidance, Emkay said. Wipro has guided for minus 1.5 per cent to 0.5 per centrevenue growth in Q1, with the mid-point of the guidance being 50bps lower than Emkay's estimate. LTIM suggested that growth will return from Q1 onwards, despite the overall discretionary spending environment being similar to that of FY24
"Consequently, earnings downgrade cycle continued in this quarter as well, although the overall pace of earnings downgrades slowed. Deal mix continued to be aligned toward cost optimization with digital transformation still on the back burner. Margin resilience continued on the back of higher utilisation, subcon optimisation, and tighter control over discretionary spends," it said.
The Fed’s recent minutes of meeting indicate that an interest cut in the near term is unlikely, which can potentially push out demand uptick. Emkay said the start of interest rate-cut cycle would act as a signaling trigger for clients to gain confidence on the inflation trajectory and macro stability, which may drive demand recovery and an uptick in discretionary spending
Its pecking order is Infosys Ltd, HCL Technologies Ltd, Wipro Ltd, Tech Mahindra Ltd (TechM), Tata Consultancy Services Ltd (TCS), and LTIMindtree Ltd (LTIM) in largecap IT stocks. Among midcaps, it likes Cyient Ltd, Birlasoft Ltd, Firstsource Solutions Ltd and Mphasis Ltd.