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Since analysts at JPMorgan downgraded its Indian IT sector stance to underweight on 18 May, 2022, India IT performance has been volatile. Despite the recent sharp correction seen in IT stocks, Indian IT companies are still trading at around 40% premium to pre-Covid average multiples.

Even as the global brokerage has remained underweight on the IT sector, it is overweight on only four Indian IT stocks which are Infosys, Mphasis, Tech Mahindra, Persistent Systems (PSYS).

“Overall signings have seen growth slow sharply over the last three quarters, per our analysis. Lastly, our analysis of management commentary this earnings season highlights that descriptions of demand/pipeline/ order book have changed from superlative to positive-comparative suggesting flagging growth ahead," the note stated.

IT Services remains a late cyclical industry and investors should take positive management commentary bearing in mind the lack of foresight the sector has displayed at inflexion points in each of the past cycles, as per the brokerage.

Management commentary on demand, order book and pipeline continues to display a strong growth bias. However, the description adjectives have gone down a notch and IT services companies are late cyclical and have been late to witness demand slowdown.

“Number of large deals won and our estimate for overall deal TCV growth on LTM basis has been slowing down over the past few quarters (see Figures 4 & 6). We believe this will reflect in revenue growth slowdown over the course of FY23," JPMorgan said in a note on Indian IT and ER&D Services.

Earnings in Indian IT Services are at risk from margin pressures and potential growth slowdown. Key debates have been whether the stocks already bake this in, whether there are genuine alternatives for India only investors to IT Services, whether the sector is attractive to buy into again, it added.

The views and recommendations made above are those of individual analysts or broking companies, and not of Mint.

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