Citi Research maintains a cautious stance on Indian IT stocks, citing ongoing uncertainties surrounding US economic growth and global trade. Despite a notable decline in stock prices, the brokerage believes that macroeconomic uncertainties are impacting the valuation multiples of these companies. With a focus on revenue forecasts, Citi Research has adjusted its estimates downward for many firms in the sector, highlighting the challenges they face.
Caution Amidst Market Volatility
The NSE Nifty IT index has lagged significantly, underperforming by 12% relative to the benchmark NSE Nifty 50 index. This disparity is surprising, especially considering the recent depreciation of the Indian rupee. Notably, the Nifty IT currently trades at a 30% premium compared to the Nifty 50, indicating a potential overvaluation amid economic headwinds.
- Key Data Points:
- Nifty IT underperformance: 12%
- Nifty IT premium: 30%
Economic Uncertainties Affecting Performance
Citi Research points out that the anticipated growth in the US economy during the October–December quarter of Donald Trump’s second term did not materialize. His protectionist policies have heightened uncertainty regarding US economic performance, which is particularly detrimental for Indian IT firms that heavily rely on the US market. Any negative shifts in the US economy can significantly impact the profits of these companies.
Moreover, the disappointing guidance from global competitors like Epam Systems Inc. and Globant further underscores the prevailing challenges in the IT landscape, as noted by Citi Research.
Pressures on Margins and Valuations
Despite the favorable impact of rupee depreciation on earnings per share estimates, Citi Research emphasizes that improving margins for top IT firms in a competitive environment remains difficult. The brokerage predicts that margins are likely to stay flat.
Valuations continue to be elevated in the Indian IT sector, a trend that has persisted since the pandemic, despite sluggish growth rates. As artificial intelligence evolves and software spending patterns shift, IT companies are expected to navigate a more challenging medium-term landscape. The free cash flow yield for leading Indian IT firms stands at 3.5–4%, which is considered unattractive given the current outlook.
Positive Outlook for Mphasis Ltd.
In a notable shift, Citi Research has upgraded Mphasis Ltd. to a ‘Neutral’ rating from ‘Sell’ following a significant correction in its stock price and an improved growth outlook. However, the near-term growth trajectory remains uncertain due to prevailing industry conditions.
Despite these challenges, monitoring the performance of Indian IT stocks remains crucial for investors, especially as economic factors continue to evolve.
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