JPMorgan Presents Cautious Outlook on IT Services Firms: TCS, Infosys, Wipro, and HCL Technologies

JPMorgan, a leading global financial services firm, has continued to express a pessimistic view on the domestic IT services sector, projecting a further deterioration in June. The institution anticipates limited opportunities for paused projects to resume and suggests that the chances of demand recovery within the next 6-9 months are minimal. Consequently, this could lead to lowered growth expectations for the second half of the financial year.

JP Morgan Adds TCS, Infosys, and Mphasis to Negative Catalyst Watch List

JP Morgan, a prominent financial institution, has included leading IT companies Tata Consultancy Services (TCS), Infosys, and Mphasis on its negative catalyst watch list. The firm predicts that these companies are likely to underperform market expectations in terms of revenue and margins during the first quarter of the financial year 2023-24 (Q1FY24). JP Morgan’s catalyst watch serves as a near-term conviction indicator for the equity coverage universe.

JP Morgan, a renowned financial institution, has indicated that a potential underperformance by Tata Consultancy Services (TCS), Infosys, and Mphasis in the first quarter of the financial year 2023-24 (Q1FY24) could result in earnings cuts for these companies. The firm estimates that TCS could face a 2-3% reduction in earnings, while Infosys and Mphasis may experience a 3-4% decrease in earnings during this period.

In a recent report, JPMorgan, a leading financial institution, reiterated its underweight (UW) stance on Tata Consultancy Services (TCS). The firm expressed concerns regarding TCS’s growth prospects in the financial year 2023-24 (FY24E) due to macroeconomic uncertainties, limiting significant margin expansion. Additionally, JPMorgan highlighted the unexpected departure of TCS’s CEO, which could introduce periods of volatility amid a challenging technology spending environment and rapidly evolving macroeconomic conditions. The firm has set a price target of Rs 2,700 for TCS by March 2024.

JPMorgan has revised its estimates for revenue and earnings of Infosys over the period of FY24-26. The firm has reduced these estimates by 1-2%, reflecting concerns about the company’s performance. Additionally, JPMorgan predicts that the shares of Infosys may reach Rs 1,150 by March 2024.

Our underweight (UW) thesis for Infosys is based on three key factors. Firstly, we have lower growth expectations for the financial year 2023-24 (FY24) at approximately 3% year-on-year in constant currency (CC). This falls below the lower end of the company’s guidance range of 4-7%. We believe that the first half of the fiscal year will be weak due to macroeconomic uncertainties, and the second half will not be able to compensate for the overall growth.

Secondly, weak leading indicators such as a decline in net new large deal total contract value (TCV) and a significant slowdown in hiring indicate weaker growth prospects for Infosys. These indicators suggest that the company may face challenges in achieving robust growth in the near future.

Lastly, Infosys has lost its growth leadership to TCS (Tata Consultancy Services) in the fourth quarter of 2023, while declining margins have not provided a growth advantage. This further contributes to our underweight view on the stock.

These factors collectively support our negative stance on Infosys. We believe that the company may face headwinds in terms of growth, and its competitive position has weakened compared to TCS. Additionally, the decline in margins has not translated into a competitive advantage in terms of growth potential.

On Wednesday, the shares of TCS saw a modest increase of 0.25%, settling at Rs 3,251.75. In contrast, Infosys experienced a slight decline of 0.30%, closing at Rs 1,301.45 per share.

The global brokerage holds an underweight position on Mphasis due to growth challenges specifically in the Banking, Financial Services, and Insurance (BFSI) vertical, along with limited potential for margin expansion. The firm has set a price target of Rs 1,550 for Mphasis to be achieved by March 2024. On June 14, the shares of the IT firm closed 1.09% lower at Rs 1,877.55.

JPMorgan commented on HCL Technologies, expressing concerns regarding the firm’s products and platforms (P&P) diversification, which has complicated its equity story and diluted the overall performance management within the organization. This diversification has potentially led to underinvestment in digital capabilities, with HCL Technologies having the lowest level of investment among its peers. Additionally, the P&P diversification has masked the margin dilution in HCL’s core IT services business.

JPMorgan has expressed its viewpoint that the products and platforms (P&P) diversification pursued by HCL Technologies is an avoidable drain on capital allocation and management resources, especially considering the current high growth in the core IT services industry. The firm has set a price target of Rs 900 for HCL Technologies to be achieved by March 2024. Previously, JPMorgan had set a price target of Rs 880 by December 2023. On Wednesday, HCL Technologies’ shares closed at Rs 1,135.70, registering a modest increase of 0.25% compared to the previous close.

JPMorgan has commented on Wipro, highlighting the company’s weak guidance for the first quarter of the financial year 2023-24 (Q124). The firm states that this guidance reflects the challenging macroeconomic environment, which is expected to result in a significant slowdown in growth throughout FY24E. JPMorgan believes that in the absence of operating leverage, Wipro will continue to face pressure. The firm also notes that Wipro’s higher exposure to consulting services puts it at a higher risk of a slowdown compared to its peers. JPMorgan maintains an underweight rating on Wipro and has set a price target of Rs 360 to be achieved by March 2024. On June 14, Wipro’s shares closed with a slight increase of 0.24% at Rs 396.60.

Conclusion

JPMorgan’s negative outlook on TCS, Infosys, Wipro, Mphasis, and HCL Technologies is driven by a combination of factors, including the challenging macro environment, limited growth prospects, margin concerns, and company-specific issues. The firm’s analysis underscores the potential adverse impact on these IT services firms, influencing its negative sentiment towards the sector. Investors and stakeholders should closely monitor the developments in the IT services space to assess the accuracy of these assessments and their implications on the financial performance of these companies.