Infosys, TCS, Wipro, HCL Tech, Coforge: Ambit cuts target prices for IT stocks by 7-12%

Ambit Capital in its latest note said it is still not the time to turn constructive on IT sector, as it cut its target prices for IT stocks by 7-21 per cent and suggested 'Sell' on nine of 11 stocks including Infosys Ltd, TCS Ltd, Wipro Ltd and Tech Mahindra Ltd, among others. 

The domestic brokerage said faster-growing global tech sub-segments are available at similar or marginal premiums, despite materially higher growth, which will likely keep Indian IT services out of favour with foreign investors, putting pressure on every rise.

"After 25 per cent correction in the last 3 months, valuation of 17 times 1-year forward P/E for tier-1 is still at pre-Covid (30 per cent premium to similar or better growing global peers). Tier-2 players at 23 times trade 35 per cent premium to tier-1," Ambit said. 

Tech Mahindra is Ambit's top buy. The domestic brokerage has upgraded Hexaware to Buy. While suggesting a 'Sell' call, it said Infosys and Mphasis are more reasonable than others. 

"We would avoid TCS – 13 quarters of no growth in developed markets, the highest margins and weaker cash generation, or Wipro Ltd – no growth in FY27 after 3 years of declines," it said.  The brokearge is  cautious on Coforge Ltd despite fall on idiosyncratic risks and aggressive acquisition accounting. LTIMindtree and Persistent Systems are its top 'Sell' calls on elevated ask rates.

Citing a previous instance, Ambit Capital said a common belief in digital transition was that IT services growth and margins will improve as digital share rises. It noted that neither of the two played out due to legacy drag. 

"Similar scenario is possible in Gen AI, but with a more pronounced impact as it hits high exposure services," it said.

Ambit Capital said Gen AI differs from past tech transitions on two counts. First, it hits at core of Indian IT and expands competition beyond IT services. 

"Even at lower end of the SI-indicated productivity, 15-20 per cent revenue deflation is possible over 3-5 years (3-7 per cent per annum). Newer work, aggression on margins, cash-dilutive deal structures and acquisition intensity may counter deflation. 

Ambit Capital said demand issues are beyond just Gen AI, with macro and crowding out of IT Services, despite benign tech spending. Gen AI deflation, need to evaluate alternative approaches and macro could affect near/mid-term and terminal growth, it warned.