TCS, Infosys, Wipro, HCL Tech: IT stocks tank up to 6% as Accenture cuts guidance; brokerages remain cautious

Indian IT stocks were hammered hard during Friday's trading session, tumbling up to 6 per cent, after global IT player Accenture lowered its revenue forecast for fiscal year 2024 to 1-3 per cent from 2-5 per cent earlier, due to economic uncertainty leading clients to reduce spending on consulting services.

Shares of HCL Technologies crashed 5.62 per cent to Rs 1,507.50 on Friday, while the shares of Wipro and LTIMindTree were down more than 4 per cent each to Rs 479.45 and Rs 4,945.05, respectively. Tech Mahindra was down 3.57 per cent to Rs 1,236.45 and Infosys shed 3.7 per cent to Rs 1497.65. TCS declined nearly 3 per cent to Rs 3,856.

Mid and smallcap were also hammered hard. IT counters including Persistent Systems, Coforge, Mphasis, Birlasoft, L&T Technology Services, KPIT Technologies, Zensar Technologies and Oracle Financial Services Software tumbled 2-4 per cent each in the broader markets. The BSE IT index was down more than 3 per cent in the early session.

Accenture's guidance cut is slightly negative for the Indian IT Services companies, though not much, said Nuvama Institutional Equities. Despite the cut, its outsourcing segment is still expected to grow higher than mid-single digits during H2FY25 – which augurs well for Indian IT companies, it said.

"More importantly, we believe FY25 Street estimates, for Indian IT companies, have been adequately rationalised, and have little downgrade risk, from current levels. We maintain our positive stance on the sector and expect a sustainable strong demand environment to drive strong earnings growth over the next three years," Nuvama added.

Overseas brokerage firm CLSA maintains a cautious stance on the sector and said that sharp downward revision in guidance implies major pick-up in the second half. "The overseas brokerage said that the revision by Accenture is in line with channel checks. Indian IT companies' commentary and the outlook for the banking and telecom sectors," it said.

Accenture is a key peer of Indian IT services companies, reported numbers in line with company guidance and Bloomberg consensus. But the company gave weak Q3 revenue growth guidance of and lowered corresponding FY24 guidance, which missed Bloomberg consensus expectations, said Motilal Oswal.

"Our discussions with Indian IT peers echoed the cautious spending environment in the near term, which should drag down FY24 operational performance for them. On the other hand, outsourcing-driven deal bookings remained robust, clocking the second highest bookings in Q2 despite the high year-ago base," it said.

Accenture's management commentary and guidance cut reflect continued softness in near-term demand as clients remain cautious about spending decisions amid macro uncertainties. The guidance implies some acceleration in revenue growth in Q4 compared to flat to low single-digit growth in H1, assuming the mid-point of Q3 guidance, said Emkay Global Financial Services.

"While ramp-up of large deal wins should aid growth in FY25 for select Indian companies, persisting weakness in discretionary spending puts consensus estimates of high single-digit growth for large caps at risk," Emkay added. "Our pecking order is Infosys, HCL Technologies, Tech Mahindra, Wipro, LTIMindTree and TCS among Tier-1 companies."

Nomura believes discretionary demand is unlikely to recover meaningfully in H1FY25 for India IT, and maintained its cautious stance. "While revenue growth for large-caps should improve in FY25F, we expect it to be driven by cost take-out deals. We expect operating performance to vary across our coverage universe in FY24-25F," it said.

Nomura has 'buy' ratings on Cognizant Technology Solutions Corp and Tech Mahindra in the large-caps space, while the brokerage has picked Coforge, Birlasoft and eClerx in mid-caps. "We have a Reduce rating on TCS, Wipro, LTIMindTree, L&T Technology Services and Mphasis," it said.

Accenture witnessed further tightening of spending post the budget cycle. For Indian IT, we believe that we may continue to see some more downward earnings revision in the near term. Large-cap IT companies to be the safer bets considering the valuation gap between mid-caps and large caps, said Antique Stock Broking in its report.

"Moreover, we may continue to see cost take-out deals filling in for the deferred transformational projects and large-cap companies excel in delivering cost optimization projects. HCL Technologies and LTIMindTree remain our key buys among the large-cap IT companies. In mid-caps, we prefer Mphasis," it added.

Disclaimer: Business Today provides stock market news for informational purposes only and should not be construed as investment advice. Readers are encouraged to consult with a qualified financial advisor before making any investment decisions.