UBS Cuts IT Sector Target Price But Sees More Upside Than Downside
On the margin front, TCS and Tech Mahindra may see slight improvements, while margins for Infosys, Wipro, and HCL Tech could decline modestly, UBS said.
UBS has downgraded the target price for Indian IT companies, citing company-specific issues that are expected to drag revenue growth. Despite this, recent market correction has been overdone, according to the brokerage, as it sees more upside than downside in the sector.
Given the negative sentiment, IT stocks were underperforming on fears of US growth slowdown, impacting the Indian IT industry. Despite these headwinds, UBS sees value in the sector, with Indian IT stocks currently trading at a 5% discount to their five-year average. The brokerage is also anticipating a near-term sector rebound.
However, with reduced valuations and improved outlook, the stocks were trading in the green on Tuesday, extending their advance for the fourth consecutive day. The Nifty IT rose 2.30% intraday to 38,073.05, the highest level since March 6. The rise in IT shares comes after US President Donald Trump softened his stance on tariffs.
Shares of all major Indian IT companies advanced with L&T Technology Services Ltd., Coforge Ltd., and Mphasis Ltd. rising nearly 3%, while Tata Consultancy Services Ltd., Persistent Systems Ltd., HCL Technologies Ltd., and Infosys Ltd. added between 2% and 3%. Shares of LTIMindtree Ltd., Wipro Ltd. and Tech Mahindra Ltd. were trading in the green.
IT Companies Earnings To Outperform Fiscal 2025
UBS expects a 5-7% earnings cut for consensus estimates, but maintains a positive outlook for financial year 2026, anticipating it to outperform fiscal 2025.
The de-rating of IT stocks has largely been attributed to concerns over a potential US slowdown, although UBS counters these fears with factors like Fed rate cuts and corporate tax reductions, which may boost tech spending. While there is uncertainty around client spending, UBS’ discussions with IT management teams suggest only a marginal impact. They also note that hyperscalers’ slowed growth was due to a supply shortage rather than a lack of demand. Cloud migration and cost optimisation are expected to remain key drivers for IT companies through fiscal 2026.
UBS Cuts Target Price
However, UBS warns that company-specific challenges, such as deal ramp-downs at TCS, HCL Tech, and Infosys, will affect revenue growth. For large-cap companies, soft revenue growth is anticipated in the fourth quarter, with minor declines expected for Infosys and Wipro. On the margin front, TCS and Tech Mahindra may see slight improvements, while margins for Infosys, Wipro, and HCL Tech could decline modestly.
Keeping these points in mind, UBS has cut the target price of TCS to Rs 4,250 from Rs 4,650, while the target price for Infosys has been reduced to Rs 2,100 apiece. The target price for Wipro has also been cut to Rs 315 per share. The brokerage also reduced the target price of HCL Tech and Tech Mahindra to Rs 2,030 and Rs 1,470, respectively.
