JPMorgan downgrades Indian IT sector but bullish on these 4 IT stocks

Since JPMorgan analysts downgraded the Indian IT sector to underweight on May 18, 2022, IT performance in India has been volatile. Despite the recent sharp correction in IT stocks, Indian IT companies are still trading at a premium of around 40% over the average pre-Covid multiples.

While the global brokerage has remained underweight in the IT sector, it is overweight in only four Indian IT stocks, namely Infosys, Mphasis, Tech Mahindra and Persistent Systems (PSYS).

“According to our analysis, overall growth has slowed strongly over the past three quarters due to the signing. Finally, our analysis of management commentary this earnings season shows that demand/pipeline/order book descriptions have shifted from superlative to positive-comparative, suggesting growth is ahead,” the note reads.

IT services remains a late-cycle industry and investors should take positive management commentary, bearing in mind the lack of foresight the industry has shown at inflection points in each of its past cycles, according to the brokerage.

Management commentary on demand, order book and pipeline continues to show strong growth bias. However, the adjectives with the description have gotten a lot lower and IT service companies are late cyclical and have only recently witnessed a slowdown in demand.

“The number of major deals won and our estimate for total TCV deal growth on an LTM basis has slowed in recent quarters (see Figures 4 and 6). We believe this will be reflected in a slowdown in revenue growth over the course of FY23,” JPMorgan said in a note on Indian IT and ER&D services.

Indian IT services profits are under pressure from margin pressure and potential slowdown in growth. The main discussions were whether the stocks already have this in hand, whether there are real investor-only alternatives in India for IT services, or whether the sector is attractive to re-buy, it added.

The views and recommendations made above are those of individual analysts or brokerage firms, not Mint.

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