TCS, Infosys, HCL Tech, Wipro, TechM: Jefferies shares 2024 outlook, prefers these two IT stocks

In its 2024 outlook note, foreign brokerage Jefferies said demand uncertainty would persist for Indian IT companies in FY25 and that increasing revenue leakage and deeper furloughs in the December quarter would imply a weak exit for FY24. Jefferies said there are significant risks to Calendar 2024 budgets, posing risks to consensus estimate of 7.7 per cent growth in FY25. IT firms would focus on supporting margins, it said expecting an aggregate constant currency revenue growth of 7 per cent YoY in FY25 and a 70 basis points margin expansion for IT firms.

Amid demand uncertainty, and rich valuations, it remained selective, with 'Buy' ratings on Infosys Ltd and Coforge Ltd. "With limited improvement in the demand environment and amidst risks of consensus downgrades, we believe that Nifty IT's 27 per cent premium to Nifty looks rich given that over the past 15 years, entering Nifty IT at these levels, has led to underperformance versus Nifty. We remain cautious on the sector with 'Buy' only on Infosys and Coforge," the brokerage said.

The brokerage said focus would be on recovery in macro and demand environment. For Tata Consultancy Services Ltd (TCS), focus would be on strategic direction under the new CEO. For Tech Mahindra Ltd, focus would be on a possible turnaround under new CEO. Investors could also be looking for a buyback from Infosys and Wipro, it said.

"Amid weak demand environment, IT firms are likely to focus on expanding gross margins as supply challenges are now behind. Utilisation, pyramiding and optimising employee costs would be the key levers to support margins amid a weak growth environment. We see further headroom on subcontracting costs, despite meaningful reduction over the last year. We believe that IT firms would be able to support margins in FY25, but any meaningful expansion would require a pickup in growth," Jefferies said.

Also read: Infosys, TCS, HCL Tech: Trading Strategies for these buzzing blue-chip IT stocks

The brokerage expects 70 basis points aggregate margin expansion in FY25, with higher margin expansion for TechM and Coforge and LTIMindtree, but a limited 30-40 basis points expansion for others.

"FY24 witnessed strong bookings across our coverage universe, and ramp-up of these deals, coupled with the low base of FY24, should lead to a pickup in growth in FY25. However, management commentary suggests deeper furloughs in 3QFY24 and no visible green shoots, which suggests that FY24 is likely to have weak exit. Furthermore, there are no signs of a budget flush either which implies lower CY23 budgets and consequently lower CY24 budgets. We thus believe the pickup in growth in FY25 would be much more modest than expected," Jefferies said.

Also read: Vedanta shares in focus after Rs 4,089 crore dividend announcement; record date, history & more