A day after a CLSA report triggered sharp declines in major IT stocks, the firm's senior research analyst Sumeet Jain spoke to NDTV Profit, explaining the decision to downgrade some of the big IT names.
Jain notably cited sustained weakness in discretionary spends while pointing out that midcap IT companies may offer more value compared to its largecap counterparts.
Talking about the recent downgrades in the CLSA report, Jain cited season headwinds and a lack of demand revival.
"Clearly the broader discretionary demand has not revived in the markets," he said. "And I guess other than the BFSI vertical, we are not actually seeing any strength in the other verticals, particularly for the large-cap players."
As a result of this sluggish environment, CLSA, in its latest report heading into the Q3 earnings season, has cut constant currency growth estimates, prompting a downgrade for HCLTech.
"HCLTech is trading at a premium to Infosys and TCS. Obviously going forward for the next two quarters, they are weaker than the December quarter. So that's where we have downgraded HCLTech," he said.
Tech Mahindra was also removed from CLSA's "high conviction" list, though it retains an outperform rating. Jain pointed to a "muted" conversion of order book to revenue and ambitious targets that may be hard to meet.
"In terms of the margin expansion ramp-up from here... the ask rate is pretty high for them to achieve their FY27 vision," he said.
For all the concern on largecap IT players, Jain remains bullish on mid-cap IT stocks, speficially LTIMindtree, Persistent SYstems and Coforge, which has recently raised eyebrows with a $2.35 billion acquisition of US-based AI firm Encora.
"We have like almost 18-20% upside on LTIMindtree and almost 40 to 45% upside on Coforge and Persistent," Jain stated.
"Given the revenue size they have of one and a half to two and a half billion dollars, they are in a very sweet spot to capitalise on the AI tailwind," he added.
Jain also clarified that CLSA is not writing off the entire sector but is recommending a reduction in positions relative to specific names.
"The money that we are talking about to take away from IT sector is more to do with the couple of downgrades we have done. On a relative basis, we are recommending within the sector to reduce the positions," he concluded.
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