Bernstein downgrades two Indian IT companies, cites risk to FY24 growth outlook
Bernstein has downgraded Wipro to ‘underperform’, but remained positive on select large caps with IT firm Infosys as its top pick
Foreign brokerage firm Bernstein has downgraded information technology (IT) major Wipro and engineering services giant L&T Technology Services Ltd (LTTS), pointing to the recent financial sector weakness that has resulted in stock volatility and risk to its FY24 growth outlook.
The brokerage has downgraded Wipro to ‘underperform’, but remained positive on select large caps with IT firm Infosys as its top pick.
Bernstein has slashed growth forecast for financial year 2024 by 3-4 per cent and earnings estimates by 3-9 per cent.
Financial services is the largest industry vertical for Indian IT services companies contributing about 30 per cent of revenues. Macro headwinds combined with liquidity issues of banks is likely to further soften the tech spending environment, warned Bernstein, reducing growth estimates across its coverage for FY24.
However, the brokerage remains positive on selective large caps – Infosys (outperform rating, top pick), TCS (outperform rating), Tech Mahindra (outperform rating).
"We downgrade Wipro to underperform on weaker growth outlook and highest exposure to BFSI. We downgrade ER&D-focused plays (LTTS) where growth impact will be higher driven by vendor consolidation (billion dollar playbook) while valuations remain premium (25x NTM P/E)," it said in a note.
The collapse of midsized US lenders Silicon Valley Bank, Signature Bank, and the merger of Credit Suisse Group AG with rival UBS Group AG has bought uncertainty bank to banking tech budgets. Commentary from companies on the BFSI sector is starting to become more cautious. As a result of the uncertainty, global IT majors like Accenture and Capgemini reduced their growth guidance by 40-50 per cent for calendar year 2023, as per the international brokerage house.
The brokerage also said that valuation multiples have come off their peaks and are now in line with or lower than their five-year average Next 12 months Price-To-Earnings levels.
"While some investors view valuations still being rich from a 10-year perspective (pre-Covid), we believe the pre-Covid valuation multiples for IT services companies were characterized by structural issues around digital shift & deflationary pressure, which have largely been mitigated," the note stated.
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