Goldman Sachs, the international investment bank and financial service provider, has updated its stance on Indian IT stocks amid the global economic slowdown and the looming worries of recession in the West. The financial services company has downgraded leading Indian tech companies like Tata Consultancy Services, Infosys, and Tech Mahindra to ‘SELL’ while upgrading Wipro to ‘BUY’.
Why has Goldman Sachs updated its stance on the Indian IT industry?
Goldman Sachs noted the imminent slowdown in the economy has not been factored in by the companies yet. As per its report, the global financial services firm noted: “We believe a slowdown in discretionary IT services spend around the growth and transformation agenda will be quite material and something not yet completely reflected in the street's double-digit revenue growth forecast for the industry for FY24.”
Interestingly, similar thoughts have been shared by Harsha Upadhyaya, President and CIO of Equity at Kotak Mahindra AMC. While speaking to Business Today, Upadhyaya noted that contrary to the positive outlook presented by the management of the Indian IT companies, the business momentum in the industry has slipped amid the broader economic slowdown.
He said, "While the management commentary is still quite positive, we believe that things are not likely to be the same as you go forward. There is every likelihood of 2023 IT budgets to get delayed or even curtailed to some extent."
Upadhyaya stressed that margin pressure and global exposure are some of the reasons why the Indian IT sector is stalling.
"We are already seeing some pressures on the margin across companies. The hiring numbers across the industry have been quite mute in the recent times. All these things point to the fact that business momentum in the IT sector is somewhat stalling," he noted.
Moreover, according to the earnings report released in the first quarter of the financial year 2022-23, Indian IT companies reported lower than expected profits. This has led to margin pressures and slashing of performance pay in many companies in the first quarter.
How Goldman Sachs updated its stance on Indian IT companies
Goldman Sachs downgraded Indian IT giant Infosys to ‘SELL’ from ‘BUY’. The target price set by the investment bank is Rs 1244. The bank believes that the valuations of the company are high and are not factoring in the impending downcycle.
The financial service provider also slashed the earnings per share forecasts of financial year 2023-2026 by up to 6 per cent.
Goldman Sachs has downgraded TCS to ‘SELL’ with a target price of Rs 2611. Moreover, the bank has also slashed the earnings per share forecasts by up to 5 per cent.
The investment bank believes that the current valuations of TCS do not take into consideration its global exposure and upcoming downtrend.
Unlike its other counterparts, Goldman Sachs has, however, upgraded Wipro to ‘BUY’ with a target price of Rs 381.
The report read, “A potential share buyback announcement over the next 6-12 months could be another positive catalyst for our Buy thesis on Wipro. Our revised 12-m TPs are Rs 381/$4.87 for local shares/ADR.”
The investment bank believes that Wipro would do well in the near term. It further noted, ““EBIT margins to see sequential improvement through-out the remainder of FY23E and touch 17.4 per cent by 4QFY23 from lows of 14.3 per cent during 1QFY23) any potential share buyback announcement by Wipro over the next few quarters (the last one concluded in January 2021 when the stock was up 14 per cent from the announcement date to closure date).”
The financial service provider has downgraded Tech Mahindra to ‘SELL’ with a target price of Rs 868. The investment bank has also cut down the company's earnings per share forecasts of financial year 2023-2026 by up to 4 per cent.
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