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Be selective with IT stocks due to subdued management outlook: Jefferies

Stocks
2 min Read Sep 24, 2024
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The Indian IT sector has come under scrutiny due to the slow growth in revenue and weak management commentary from key players like HCL Tech, Tech Mahindra, and LTIMindtree. In its recent note, Jefferies suggested that investors in share market investment should remain cautious and selective when it comes to IT stocks. The combination of rich valuations, fluctuating stock prices, and limited scope for margin expansion in FY25 paints a challenging picture for potential investors.

Weak management commentary clouds IT sector prospects.

Although the recent 50 basis points interest rate cut by the US Federal Reserve has increased attention on the IT sector, the management of leading IT firms has yet to see any significant improvement in demand. 

This cautious stance, combined with steady but slow deal wins that are more focused on cost-cutting and vendor consolidation, suggests that IT companies may struggle to see substantial growth in the near term. Jefferies pointed out that Indian IT companies have reduced discretionary spending due to macroeconomic uncertainties, high borrowing costs, and inflationary pressures, further challenging share market investment in this sector.

Limited margin expansion and recession fears

Jefferies expects limited margin expansion in FY25, primarily driven by slow revenue growth. Despite the interest rate cuts bringing some relief to the IT sector, fears of a recession in the US continue to weigh heavily on the outlook. The August jobs report further fueled these concerns, with the unemployment rate dipping slightly but missing expert expectations. This could lead to slower client spending, impacting the revenue potential of Indian IT companies.

On September 23, the Nifty IT index was the worst-performing sector, with major players like TCS, Infosys, HCL Tech, and Wipro losing up to 0.8% in trade. The weak performance reinforces the need for a selective approach when considering share market investment in IT stocks.

Key takeaways

  • Slow revenue growth: Jefferies highlights limited scope for margin expansion in FY25.

  • Cautious approach: Weak management commentary from top IT firms suggests a selective strategy is advisable.

Recession fears: US economic concerns and lower discretionary spending could impact IT sector performance.