TCS, Infosys, Wipro and HCL Tech: Here’s why JPMorgan is negative on IT services firms

Global financial services major JPMorgan has maintained its negative view on the domestic IT services universe, as it sees demanding worsening in June. It believes that paused projects may have limited chance of restarting and signs of demand recovery over the next 6-9 months could be low, potentially driving growth expectations in the second half of the financial year lower.

JP Morgan has placed IT majors Tata Consultancy Services, Infosys and Mphasis on the negative catalyst watch list. It believes that these companies will disappoint the markets on the revenue and margin fronts in Q1FY24. According to JPMorgan, catalyst watch is its near-term conviction indicator for the equity coverage universe.

It added that a miss can drive 2-3 per cent earnings cuts for TCS and 3-4 per cent earnings cuts for Infosys and Mphasis in Q1FY24.

On TCS, JPMorgan said in a report, “We remain UW (underweight) on the stock as we bake in lower growth from macro concerns in FY24E that will also limit significant margin expansion. Moreover, the unexpected CEO departure could lead to periods of volatility in a time of weaker tech spend and rapidly evolving macro.” It has set a price target at Rs 2,700 by March 2024.

On the other hand, it also cut estimates for revenue and earnings by 1-2 per cent over FY24-26 for Infosys. It feels the company’s shares may hit Rs 1,150 by March 2024.

“Our UW thesis (for Infosys) is driven by three main factors: Lower growth expectations in FY24 of around 3 per cent CC YY, below the lower end of the company’s guide of 4-7 per cent, as we believe 1H will be weak, given the uncertain macro, and 2H won’t be able to carry the burden of lifting full-year growth; weak leading indicators in the forms of declining net new large deal TCV and a sharp slowdown in hiring, suggesting weaker growth ahead; and Infosys’s loss of growth leadership to TCS in Q423, while slipping margins are not yielding a growth advantage,” it said.

Shares of TCS settled 0.25 per cent higher at Rs 3,251.75 on Wednesday, while Infosys closed 0.30 per cent down at Rs 1,301.45 apiece.

The global brokerage is underweight on Mphasis due to growth challenges in the BFSI vertical and limited scope for margin expansion. It has set a price target of Rs 1,550 for Mphasis by March 2024. Shares of the IT firm closed 1.09 per cent down at Rs 1877.55 on June 14.

Commenting on HCL Technologies, JPMorgan said the firm’s products and platforms (P&P) diversification has complicated its equity story and diluted organisation-wide performance management. It has likely driven underinvestment in digital (lowest among peers) and masked margin dilution in its core IT services business.

“We see it as a source of avoidable drain on capital allocation and management resources when the core IT services industry growth is at a multi-decade high,” JPMorgan said. The financial services firm has set March 2024 price target at Rs 900 for HCL Technologies. Earlier, JPMorgan had set a price target of Rs 880 by December 2023. HCL Technologies settled at Rs 1,135.70 on Wednesday, up 0.25 per cent against the previous close.

It further said that Wipro’s weak Q124 guide highlights the challenging macro environment that will lead to a sharp slowdown in growth in FY24E and keep it under pressure in the absence of operating leverage. “Wipro’s higher consulting exposure keeps it at a higher risk of a slowdown than peers,” JPMorgan said while maintaining an underweight rating with a March 2024 price target of Rs 360. Shares of Wipro closed 0.24 per cent up at Rs 396.60 on June 14.

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