India's leading software exporters could see a valuation-led correction driven by macro headwinds in the U.S., according to Credit Suisse.
The current valuations are "unsustainable in a worsening U.S. macro scenario", brokerage said in a note adding, it expects the top four IT names to fall 10–27%.
"We see HCL Technologies Ltd. at high risk of an over 20% valuation correction, about 15% for Infosys Ltd. and Wipro Ltd., and around 8% for Tata Consultancy Services Ltd.," Credit Suisse Research Analysts Alok Srivastava said.
While this leads to a high risk of revenue cuts, it will not translate into large earnings cuts thanks to several margin levers in place for FY24, Credit Suisse said.
The sector, which boomed on the back of cloud transformation during the pandemic era, is also witnessing a slowdown in demand for the same, the brokerage said.
Stock Strategy
Credit Suisse suggests staying selective in the sector. The brokerage has an 'outperform' rating on Infosys with a target price of Rs 1,710. Given its superior growth, this is the only outperform-rated stock in the entire IT pack.
Meanwhile, it maintains a 'neutral' rating on Tata Consultancy Services and HCL Technologies with a target price of Rs 3,300 and Rs 970, respectively.
The brokerage keeps an 'underperform' call on Wipro Ltd. with a target price of Rs 350.
Credit Suisse expects a small drop in earnings per share, even though there is a high chance of a drop in revenue due to weak global macro.
"Our base case margin improvement of 40-80 bp in FY24 is likely to hold for TCS and Infosys, while we see flat margin for Wipro in a low revenue case," the brokerage said.
The NSE IT Index was trading 2.27% lower as of 11:30 a.m., dragged by HCL Technologies, which slumped 6.56%.
TCS traded 1.24% lower, while Infosys was down 2.97%. Wipro declined 1.31%.
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