The Nifty IT index rose 2 percent to 30,278.15 today, led by Emphasis, Coforge, HCL Tech, Tech Mahindra and Infosys. Despite disappointing Q1FY24 earnings, the IT index has been rising for the past two days. Market sentiment improved after the tech-heavy Nasdaq rose 1% for a second straight day on Thursday, as data showed the annual increase in the US producer inflation estimate was the smallest in nearly three years. The Nifty IT index rose 3.5% year-to-date compared to a 7.2% jump in the Nifty 50 index. Analysts at Nirmal Bang maintain ‘Sell’ rating on all IT stocks. While EPS estimates are lower than the Street, the brokerage suspects the sector could still see shortfalls if a deeper recession in the US takes hold.
Consensus understates growth and margin risks in FY24/FY25
The Nifty IT index rose 83% from December 31, 2019 to June 13, 2023, while the Nifty 50 rose 52% during the same period. This massive rally in the Nifty IT index was on the back of a significant multiple expansion on pandemic-driven digital transformation (DT) services-based revenue acceleration and unprecedented economic stimulus in the US and Europe. Nirmal Bang says the DT high tide of the past 36 months has lifted all boats. However, the accelerated normalization of monetary policy in the US raises the probability of a hard landing there, resulting in a higher chance of fundamentally negative surprises over the next 12 months. The brokerage believes that consensus understates growth and margin risks in FY24/FY25.
TCS and Infosys assessment is still expensive; A stock can deliver single digit returns in 5 years
“Even ignoring the next 12-18 month risks surrounding a recession and taking a 5-year view, we believe valuations are expensive to start with and can deliver good single-digit total stock returns (including dividends). For TCS
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Wipro: Sell – Target price: Rs 338
“We have revised our estimates based on 1QFY24 and 2Q guidance, leading to downward revisions to diluted EPS for FY24-FY26. While keeping our target PE multiple constant at 13.5x (30% discount to TCS), we advance the valuation to June 2025, leading to a target price (TP) of Rs 338,” said Nirmal Bang.