JP Morgan gives unexpected upgrade to IT sector, lifts Infosys, L&T Tech to ‘overweight’

Prominent brokerage firm JPMorgan has revised its outlook on the information technology sector, shifting from a previously pessimistic stance to a more balanced ‘neutral’ position. This adjustment is motivated by anticipations of a shift in the stance of the US Federal Reserve towards rate cuts, coupled with a favorable base.

In line with these expectations, the brokerage has also elevated its ratings for key players in the IT sector, such as Infosys and L&T Technology Services, to ‘overweight.’ Additionally, it has upgraded others, including TCS, HCLTech, Mphasis, and Persistent Systems, to ‘neutral’ calls, marking a departure from their earlier ‘underweight’ status.

Also read: Infosys, Wipro and Tech Mahindra to witness revenue dip in Dec quarter: Kotak Institutional Equities

Following these upgrades, the shares of most IT companies experienced a modest uptick on January 4, contributing to a roughly 1 percent increase in the Nifty IT index.

The company relies on the anticipation of a shift from rate cuts to cost-saving measures, pro-cyclicality strategies, near-term preparations for generative artificial intelligence (Gen AI), and the significantly low base of 2023 as key factors driving the numerous upgrades.

Despite the overall bullish trend in the market in 2023, the IT sector has lagged behind, primarily attributed to a challenging macro environment. Prolonged deal conversions and a reduction in IT spending as businesses scaled down have been significant contributors to this underperformance.

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Nevertheless, optimism regarding the U.S. central bank’s potential success in orchestrating a smooth economic slowdown, coupled with indications of an earlier-than-anticipated initiation of the interest rate reduction cycle, suggests a more favorable macroeconomic landscape for the sector.

However, on the other hand, brokerage firm Kotak Institutional Equities projected a decline in year-on-year (YoY) and quarter to quarter (QoQ) revenue in the December quarter for IT giants Infosys, Wipro and Tech Mahindra.

“We expect a weak quarter for IT Services companies as furloughs, weak discretionary spending and project cuts impact performance. Three of the big five IT services companies should report a yoy and qoq decline in revenues in the December 2023E quarter, while growth for the other two will trickle down to low-single digits,” Kotak said in its report.

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According to the brokerage firm, the growth rate of Infosys is likely to decline by 1.9% YoY and 2.2% QoQ, Wipro to witness 6.9% YoY and 2.7% QoQ, TechM of 8.8% YoY and 1% QoQ, and MPhasis of 9.4% YoY and 0.5% QoQ.

Meanwhile other analysts anticipate that the favorable catalysts will manifest in the financial results of major IT companies towards the latter part of FY24 or the commencement of FY25.

As optimism about a recovery gains momentum, analysts suggest that investors considering entry into the market with a long-term outlook should redirect their attention to IT stocks. This is because the valuations of IT names appear to be more reasonable compared to other stocks that have experienced a substantial rally in 2023.