Indian IT companies saw a tough first quarter in the current fiscal, and the upcoming second quarter is expected to have headwinds as well. Global investment and consulting firm, Morgan Stanley, has articulated a cautious, yet selectively optimistic stance on these stocks amid a challenging first quarter and a projected muted performance in the second quarter.
Considering the weaker revenue and margin in April-June, the brokerage has lowered the estimates of constant-currency revenue growth by up to 424 basis points in FY24. “We project fiscal 2024 constant currency revenue growth of –0.1 per cent to 6 per cent for the top five.”
Margin pickup
While the bank advises investors to exercise selectivity and focus on the medium-term outlook due to relative valuation support, it underscores a potential cyclical pickup in the latter half of FY24 and FY25. These predictions are in line with the concluding commentary by IT executives for FY23. As tough macroeconomic conditions persist, IT executives are not expecting margins to pick up until the second half of FY24.
Morgan Stanley perceives the greatest risk to FY24 consensus estimates for Tech Mahindra, TCS and Mphasis. The risks to FY24 consensus estimates are deemed relatively lower for HCL Technologies and LTIMindtree (LTIM). The investment bank’s current preference leans towards large-cap stocks over mid-cap ones. Its preferred picks in this sector are Infosys, HCL and LTIM.
In its latest report, Morgan Stanley has revised its target price for several prominent IT stocks. Several others, including TCS, Infosys and Wipro saw their target price being cut by the firm.
Accenture’s forecast
Global IT giant, Accenture, also signalled more pain for the IT industry with disappointing forecasts. Accenture fanned concerns about dwindling IT spending on Thursday with a quarterly revenue forecast that was below Wall Street estimates, sending its shares down more than 5 per cent.
CEO Julie Sweet said clients were “holding back on small deals” in the face of an uncertain economic outlook, mirroring remarks from Cognizant Technology Solutions (CTSH.O) last month.
The company blamed the weakness on its business catering to the tech, media and communications industries, which have sharply dialed back spending in recent months to cope with the slowing growth. Revenue for that group fell 8 per cent in the third quarter.
North America — Accenture’s biggest market — also performed poorly in the March to May period, with revenue growth slowing there to a near three-year low of about 2 per cent.