TCS, Infosys, Wipro, HCL Tech, TechM shares: IT outlook ahead of US elections, rate cuts

IT stocks: There has been a moderation in the quantum of Fed rate cuts (now three) that stock investors globally are looking at by the remainder of this calendar. The recent guidance by Accenture’s and Capgemini were seemingly weak and, US elections in November -- the ex-US president Donald Trump is ahead of Joe Biden in surveys, is adding an additional layer of uncertainty. Nirmal Bang Institutional Equities said there is a further scope of downside revision in Indian IT earnings.

The BSE IT index has risen 2 per cent in 2024 so far, in line with the BSE Sensex. The largest IT player Tata Consultancy Services (TCS) shares have rallied 10.20 per cent during this period. The second largest player Infosys has risen 4 per cent; HCL Technologies and Wipro, the next in line, have gained 8-11 per cent while Tech Mahindra (TechM) shares are flattish for the period.

Nirmal Bang said the consensus view on the number of rate cuts in 2024 has moved from 6-7 (150-175 bps) about three months back when the US Fed first hinted at, to 3 cuts, in line with the Fed’s view. The recent hotter-than-expected inflation data has a few economists wondering if the next move of the Fed is going to be a raise! Even if one ignores this minority view, the question is whether a Fed funds rate cut from 5.25-5.5 per cent to 4.5-4.75 per cent (by 75bps) be good enough to entice enterprises to spend more.

"Up until 2022, enterprises and households have been used to significantly lower interest rates since the GFC. Accenture’s and Cap-gemini’s seemingly weak guidance for FY24/CY24 may see downward revisions (Accenture 2Q results due on 21st March, 2024). Guidance by both the firms assumes 4.5 per cent CQGR in 2HFY24/CY24," it said.

On Trump's prospects, Nirmal Bang said the US presidential election in November is going to add to the uncertainty. It said Donald Trump has put out his economic and foreign policy agenda, which may pose uncertainty not only from first order effects but also from second order ones.

"While the race between Biden and Trump may be close, going by recent media polls, Trump seems to have a lead.

For instance, businesses may be directly impacted by Trump’s tariff plan vis-à-vis not just China but also with other countries. Similarly, he has a dramatically different (to put it mildly) view on immigration compared to Biden. Both these plans, even if implemented in a diluted form, could put upward pressure on inflation," it said.

"However, there are also likely other measures – like negotiating a quick end to the Ukraine war and a more hydrocarbon-based energy plan that could have a deflationary impact, especially through the energy markets," Nirmal Bang added.

Given the backdrop, Nirmal Bang said the current revenue assumptions seem aggressive in the context of industry commentary, the timing of turnaround in growth, prospects of US interest rate trajectory and uncertainty around US economic policies consequent to the presidential elections.

"We expect 4-7 per cent CC revenue growth guidance by both Infosys and HCL Technologies. Even this may be at risk if the Fed funds rate is not cut materially or if enterprise customers freeze up due to US election uncertainty. We see ‘slower for longer’ demand conditions through 2024 that could pare consensus earnings expectation," it said.

Nirmal Bang, which has been unedrweight on IT sector since April 2020, said it believes that the starting valuations are expensive and can at best deliver mid to high single-digit total stock returns including capital return to shareholders for TCS and Infosys, as it believes structural earnings growth is being overestimated by the Street.

"We also expect margins for most companies to remain in a narrow band at around FY24 levels and not see a material expansion (except for Tech Mahindra where it starts from a very low base). Ceteris Paribus, this has valuation/return implications," it said.

Nirmbal Bang said it has ‘SELL’ rating on all IT stocks under its coverage, except Tech Mahindra.