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Bernstein downgrades two Indian IT companies, cites risk to FY24 growth outlook

 

Foreign brokerage firm Bernstein recently downgraded engineering services giant L&T Technology Services Ltd. (LTTS) and key information technology (IT) company Wipro, citing the financial sector’s weakness as the reason. The development projection for FY24 is subject to risk.

Although the brokerage downgraded Wipro’s rating to “underperform,” it maintained an optimistic outlook on a few large caps as the IT company rose to the top of Infosys’ list.

Growth and profit projections for FY24 have been lowered by Bernstein to 3–4% and 3–9%, respectively.

With a 30% revenue contribution, the financial services sector is the largest industry vertical for Indian IT services firms. In his coverage for FY24, Bernstein cautioned that macro headwinds along with banks’ liquidity problems are likely to further soften the environment for tech spending. He also lowered growth forecasts.

However, the firm continues to be bullish on a few big caps, including Tech Mahindra, TCS, and Infosys (Outperform Rating, Top Pick). (Outperform Rating).

“Due to the BFSI sector’s high risk and the weak growth forecast, we downgrade Wipro to Underperform. We downgrade ER&D-focused plays (LTTS), where the valuation premium will remain (25x NTM P/E) and growth effect will be high driven by vendor consolidation (billion dollar playbook).

Uncertainty in the banking technology budget has been brought on by the failure of mid-sized US lenders Silicon Valley Bank and Signature Bank as well as the merger of Credit Suisse Group AG and competitor UBS Group AG. Corporate comments on the BFSI industry has begun to become more circumspect. International brokerage houses claim that due to the uncertainty, major global IT firms like Accenture and Capgemini reduced their development forecast for the year 2023 by 40% to 50%.

The brokerage also stated that over the next 12 months, valuation multiples will be at or below their five-year average price-to-earnings levels because they have declined from their high.

We believe that pre-Covid valuation multiples for IT services companies were characterized by structural issues around digital transformation and deflationary pressures, which have greatly diminished, even though some investors still view valuations as being rich from a 10-year perspective (pre-Covid).

Disclaimer: o2help does not endorse the opinions or suggestions expressed above by specific experts or brokerage firms. Before making any investment decisions, we counsel investors to conduct their own research and consult with licensed experts.

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