CLSA cautious on IT sector; downgrades TCS to 'Sell'

MUMBAI: CLSA remains cautious on the IT sector as its sees business conditions for customers of Indian IT vendors to remain difficult. The brokerage maintains ‘underperform’ on Infosys Technologies, HCL Tech, Tech Mahindra and Wipro while downgrading TCS to ‘sell’.
“The near-unidirectional derating of the IT sector in the past 18 months is as much a function of the cyclical slowdown in IT spending as the transformational challenges that lie ahead.

This valuation compression is structural and part of a gradual process of recognising a changing business model and lower EPS CAGRS ahead. India market valuations should no longer be considered trough levels for tier-1 Indian tech. Our analysis suggests 12-15x PE is fair and sustainable,” the report said.

According to the brokerage Indian tech sector is no longer a multiyear investment theme and even on a 12-month view, it remains Underweight and have no ‘buys’ in its coverage.

According to CLSA’s analysis of industry-wide trends there is a growing need for Indian companies to move out of comfort zone to fund future growth.

“Greater investment and a big increase in the cost base are necessary to sow the seeds for medium-term growth. We expect thinner margins and higher asset intensity to hurt industry-wide return ratios,” the report added.

CLSA has downgraded TCS to Sell as it is of the view that “TCS’ scale and valuations should limit its share price performance.”

“Greater appetite for innovative deal structures implies TCS and HCL could remain revenue growth leaders but TCS’ scale and valuations should limit its shareprice performance and we downgrade the stock to SELL,” the report said.

It has also lowered target price on TCS to Rs 1,140 from Rs 1,290.

It has maintained underperform rating on Infosys Technologies and reduced price target to Rs 2,355 from Rs 2,400.

“Infosys is entering a new phase of leadership transformation as well as more aggressive growth strategies and the outcome remains uncertain,” it said.

While maintaining underperform rating on HCL Tech, the brokerage has increased its target price to Rs 610 from Rs 580.

CLSA has also maintained underperform on Wipro and Tech Mahindra with target price of Rs 350 and Rs 950 respectively.

“Wipro’s struggle with topline growth as well as profitability is a burden. Tech Mahindra is buying growth to achieve scale but a rerating is unlikely,” the report said.

At 10:30 a.m.; the BSE IT Index was down 0.10 per cent. Infosys Technologies was down 0.69 per cent and Wipro was 0.26 per cent lower. Tech Mahindra was up 0.58 per cent, TCS was up 0.81 per cent, HCL Tech gained 0.33 per cent.