Stay selective on IT stocks amid soft management commentary, rich valuations: Jefferies
Jefferies sees limited scope for margin expansion in FY25 owing to slow revenue growth.
The US Federal Reserve’s outsized 50 basis points interest rate cut have increased investors’ attention towards IT sector as a weaker dollar is likely to help revive client spending, reduce interest burden on firms, allowing for more operational expenses, and push out more deals. However, the management of HCL Tech, Tech Mahindra, and LTIMindtree highlighted that there has been on material change in the demand environment recently, said Jefferies in a recent note.
The brokerage firm advocated investors to remain selective in IT counters, given sombre management commentary, sharp movements in stock, and rich valuations. Moreover, they see limited scope for margin expansion in FY25 owing to slow revenue growth.
While the deal wins are steady, but it continue to remain skewed towards cost take out and vendor consolidation programs, added Jefferies.
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In recent years, Indian IT companies, which draw significant revenue from US markets, have reduced their discretionary spending due to macro uncertainity, high borrowing costs, and inflationary trends. The Fed’s 50 bps rate cut is expected to bring some relief to IT stocks as it would allow businesses to borrow more and spend more.
However, this cycle is different as recession fears are casting a shadow on the US economy. The disappointing August jobs report points out that the labour market is clearly softening, fueling fears of recession. The unemployment rate dipped to 4.2 percent last month, down from July’s 33-month high of 4.3 percent.
While the Labour Department said that US employers reported an increase in 142,000 non-farm payrolls in August, from July’s initially reported 114,000 jobs, but it fell short of expert estimates of 160,000.
On September 23, Nifty IT index was the standout loser among the sectoral pack, dropping 0.5 percent. The declines were being lead by TCS, Infosys, HCL Tech, Wipro, and LTIMindtree that lost up to 0.8 percent in trade.
Bymoneycontrol
