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The 2024 growth outlook for the IT sector remains weak at best, even as it has not reflected in valuations since November 2023, as Nifty IT is up 23 per cent and outperforming Nifty by 10 percentage points, according to brokerage and investment group CLSA. The brokerage has downgraded the rating on TCS and HCLTech from “underperform” to “sell” and has reiterated the “sell” rating on Wipro and LTIMindtree.
The non-reflection in valuations is primarily due to the softening of the US 10-year bond yield by 50 basis points, improving demand commentary by hyper-scalers and the hype around Gen AI with Nvidia reporting better-than-expected results and guidance. The percolating impact of these tailwinds, however, fail to reflect in various IT service companies’ (Cognizant, Capgemini, Genpact, EPAM and Globant) CY 24 revenue growth guidance and the growth outlook for banking, retail and telecom verticals.
Even the 2024 ordering activity outlooks from Information Services Group (ISG) and Gartner IT Services Forecast are reminiscent of CY2019 trends and the Nifty IT’s valuation is 28 times its annual expected earnings.
The brokerage also noted that banking, retail and telecom 2024 vertical outlooks are not very different from 2023 and the banking sector technology spend direction for 2024 still remains uncertain. In telecoms, overall capex intensity in CY24/25 is largely flat per Bloomberg consensus 2024 guidance from global IT service companies does not exude confidence.
CLSA believes mid-single digit revenue growth guidance by HCL Tech and Infosys in April 2024 would be a negative catalyst for TCS, HCL and Wipro.
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