Tata Elxsi, LTIMindtree, Mphasis, L&T Tech shares: JPMorgan sees up to 41% fall on these IT stocks

Foreign brokerage JPMorgan believes the demand deterioration in the IT sector persists in the June quarter and a quick recovery is unlikely over next 6-9 months. It has trimmed its Street-low estimates by 1-3 percentage points for a couple of IT names to bake in June quarter weakness, as the brokerage does not anticipate any recover in the second half of the financial year.

Tata Elxsi share price target

For Tata Elxsi, JPMorgan has a target of Rs 4,600, which suggests a 40.64 per cent drop from the prevailing price of Rs 7,749.80. JPMorgan said it is underweight on this stock on the back of what it sees as its excessive valuation of 57 times one-year forward P/E when growth is slowing and margins are not likely to expand.

"A reverse DCF on the share price implies a 25 per  cent revenue CAGR over the next decade, which we believe is overly optimistic. We note that ER&D spend tends to be more discretionary in nature than IT services and hence is at higher risk from a potential macro slowdown," it said.

L&T Technology Services share price target

For L&T Technology Services, JPMorgan has a target of Rs 2,900, which suggests a 25.34 per cent potential downside over its Wednesday's closing price of Rs 3,884.75. JPMorgan has cut constant currency (CC) revenue estimates for L&T Technology Services by 2 per cent for FY24 to FY26, leading to 1 per cent cuts to earnings. 

JPMorgan said the stock is trading at 30 times one-year forward PE and "we find the valuation burden high given slowing growth and declining margins."

"A reverse DCF implies a 17 per cent revenue CAGR over the next 10 years and that appears to us to be a big ask,"

Persistent Systems share price target

For Persistent Systems, JPMorgan's target of Rs 4,100 suggests a 17 per cent potential downside ahead. JPMorgan noted that Persistent System's global peer EPAM recently cut its revenue guidance from 3 per cent growth in 2023 to minus 2 per cent, led by cuts in discretionary digital engineering spends by clients. Persistent Systems, it said has the highest exposure to discretionary spends at 83 per cent against Indian IT peers at 40-75 per cent.

LTIMindtree share price target

JPMorgan finds LTIMindtree Rs 3,850 worthy. It said the merged company will find it difficult to clock strong growth in a weakening macro environment and this will also have an impact on margins from the absence of operating leverage. JPMorgan's target for the stock suggests a 21 per cent downside from the prevailing level.

Mphasis share price target

JPMorgan has a target of Rs 1,550 for Mphasis, which suggests an 18 per cent downside potential.  The global brokerage is underweight on Mphasis due to growth challenges in the BFSI vertical and limited scope for margin expansion.

"Our Mar-24 price target of Rs 1,550 is based on a 16 times one-year forward P/E, which is -1SD of its three-year average. We believe this is justified by our lower growth expectations for Mphasis compared to LTIMindtree," it said.

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