IT stocks: Weak EPAM guidance sends Persistent, Mphasis, Coforge, Cyient shares falling; TCS, Infosys down 2% each

Concerns over demand slowdown in discretionary spending in IT sector sent many midcap IT shares such as Persistent Systems, Mphasis, Coforge and Cyient tumbling in Tuesday's trade, even as largecap stocks such as TCS, Infosys and HCL Tech restricted losses. This is as US-based EPAM Systems cut its Calendar 2023 revenue growth outlook  again, expecting a 2 per cent decline in revenues in the constant currency terms at the mid-point of the guided band.

Analysts noted that EPAM has been hit by high exposure to discretionary spending and certain company-specific factors and that domestic Indian IT firms have a more balanced portfolio between discretionary and maintenance spending.

Yet, "we believe the recent run-up in the sector has been ahead of fundamentals," Kotak Institutional Equities said in a note. "We believe that upsides do exist in Infosys and HCL Technologies but are wary of other names," it added.

Shares of Persistent Systems plunged 4.62 per cent to Rs 4,973.50. Coforge shares slipped 3.82 per cent to Rs 4,418. 40. Mphasis,  Cyient and Zensar Technologies declined 3.71 per cent, 3.10 per cent and 2.80 per cent, respectively. LTIMindtree dropped 2.14 per cent to Rs 4,838. Among largecaps, Tech Mahindra also declined 2.20 per cent ti Rs 1,084. TCS fell 1.81 per cent while Infosys skidded 2 per cent. HCL Tech and WIpro declined 1.4 per cent each.

"Delays in client decision-making and pullbacks in discretionary spending have implications for the growth of Indian IT. We expect revenues in 1QFY24E to be weaker than 4QFY23 across companies in our coverage universe. We believe that the demand environment is especially weak in the financial services and technology segments. A prolonged recovery in clients’ willingness to spend would imply downside risks to FY2024 revenue growth estimates. Noting the weak demand, we are surprised by the rally in stock prices across our coverage in the past month," Kotak Institutional Equities said.

The brokerage said Indian IT will benefit from cost take-out programs and mega-deals. However, these positives are outweighed by the broader caution in spending, especially in the impacted verticals, it said.

"SaaS and digital engineering companies’ commentary and revenue guidance suggests weak demand in the Jun’23 quarter with subsequent revival of demand in H2FY24/H2CY23 because, even though the sales cycle is lengthening, pipeline is not shrinking. Plus, there is demand from cost optimisation opportunities," said ICICIdirect.

This brokerage believes that weakness in revenue growth in 2023 is largely priced in the stock prices at current valuations, with Nifty IT index trading at 22 times one-year forward EPS, 2 epr cent premium to 5-year average PE.

"We continue to prefer Infosys (BUY) and Persistent Systems (BUY), followed by LTIMindtree (BUY) and TCS (BUY)," it said.

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