Subdued outlook: Tsunami of rating downgrades sinks Infosys stock

Over 10 brokerages lower price targets after guidance disappointment

At least 10 brokerages, including J.P. Morgan, Macquarie, and Citi have lowered their rating on Infosys stock and its American depositary receipts after the information technology (IT) heavyweight released the new guidance for the sector.
 
 Analysts are now the least bullish on Infosys since December 2019, according to data compiled by Bloomberg.
 
 Shares of Infosys nosedived as much as 15 per cent on Monday — the biggest intraday slump since October 2019 — after the company’s guidance painted a negative outlook for India’s technology sector, in the aftermath of the US and European bank maelstrom.
 
 The stock finally ended at Rs 1,259, down 9.4 per cent over its previous day’s close. This was the biggest single-day fall for the Bengaluru-headquartered firm since October 22, 2019, when it had plunged 16.2 per cent. It was also its seventh biggest fall since 2010.
 
 The IT services firm was hit by a wave of downgrades after stating on Thursday that sales growth would be just 4-7 per cent this financial year (2023-24, or FY24) because of a reduction in client spending and an uncertain demand environment catalysed by US bank meltdowns. That compared with an average analyst estimate of 10.6 per cent.
 
 The outlook for India’s IT services sector is set to worsen further over the next six months before bottoming out, said Reliance Securities.
 
 “Uncertainty in the US and the European Union region, coupled with pricing pressure, would lead to a challenging FY24,” analyst Mitul Shah wrote in a client note.
 
 A gauge for the performance of IT stocks fell as much as 7.6 per cent on Monday — the biggest intraday decline in more than three years. The Nifty IT recouped some losses to finish at 4.71 per cent.
 
 “Some industries, such as financial services in mortgages, asset management, investment banking, telecommunications, high-tech and retail, are more impacted, leading to uncertainty in spend and delays in decision-making,” Infosys Chief Executive Officer Salil Parekh told reporters after the earnings announcement on Thursday.
 
 Nomura’s India unit said the current financial year will likely be “a year of revenue growth disappointment” for many IT companies in the country.
 
 “Increasing macroeconomic headwinds are likely to create challenges in terms of growth, as enterprises delay their decision-making and prioritise cost optimisation projects with upfront benefits, over transformation projects with back-ended returns,” analysts Abhishek Bhandari and Krish Beriwal wrote in a research note.
 
 Investec, while lowering its price target on Infosys from Rs 1,685 to Rs 1,605, said investors can look to buy into the weakness as “earnings have now bottomed out and management commentary assumes a buffer for uncertainties”.
 
 Weak earnings growth for software exporters may further hurt the outlook for India’s current account deficit already under pressure from rising oil prices and softening exports.
 
 The International Monetary Fund last week trimmed its growth outlook for India to 5.9 per cent for the financial year beginning April 1, from a previous forecast of 6.1 per cent made in January.
 
 Analysts don’t rule out further derating in IT stocks in the event of a recession in the developed world.
 
 “Our valuations are based on a quick resolution to the global banking crisis and problems arising from banking industry events remaining localised to banking and financial services. We do not assume a deep recession in our valuation base case. The increasing probability of recession does pose risks to multiples... Stock valuations do not bake in a recession but do build in a slowdown. Large-cap stocks are 15 per cent away from building in a recessionary scenario,” read a note by Kotak Institutional Equities.