Indian information technology companies will continue to face downside risks to consensus earnings, but current valuations do not suggest such risks are factored in, according to Citi Research, which remains 'underweight' on the sector.
Despite some improvement in outlook next year, compared to the current fiscal, the brokerage remains cautious as expectations of stronger recovery and valuations are high and not adequately supported by fundamentals.
Post December quarter earnings, Tata Consultancy Services Ltd., Infosys Ltd., LTIMindtree Ltd., HCLTech Ltd., L&T Technology Services Ltd. and Tata Elxsi Ltd. witnessed downgrades in earnings estimates, Citi said.
The period also reveals modest improvement in discretionary spending, with growth extending beyond US financial services. However, total contract value trends are soft, with mixed views on deal cycles and tenures, Citi said.
While the financial sector shows resilience, the auto industry continues to face challenges. Headcount growth remains muted despite positive commentary on discretionary spending. Margins remain stable as companies focus on aggressive cost management. Generative AI continues to inspire optimism, though emerging trends in productivity pass-through warrant attention, the brokerage said.
Defensive Play
Citi prefers Infosys and HCLTech in the IT pack, with 'neutral' rating on both stocks.
Nifty trades at nearly 30 times its one-year forward consensus earnings estimate, the brokerage noted.
"The NSEIT premium over NIFTY is at ~50%, which is again close to 15-year highs—a result of defensive positioning by investors given challenges in some domestic sectors as well as USD strength. Positioning in Indian IT appears high and not adequately supported by fundamentals, in our view. We believe any improvement in domestic businesses can lead to a significant rotation," the note said.
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