Stock analysts from brokerage Credit Suisse expect India's top four Indian IT companies to witness a 10-27 percent valuation-led correction, with HCL Tech likely to be the worst hit. They believe that there is a high risk to revenue cut for financial year 2024 in case growth in the US slows down further.

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Most Indian IT companies derive majority of their revenue from the North American market, particularly the US.

Credit Suisse in its latest note said that US GDP projections are on a downward trajectory and further cuts cannot be ruled out.

The firm added that there is a high risk of revenue downgrades due to weak global macroeconomic conditions. However, they do not expect a significant impact on margin and only expect a 2-4 percent cut in Earnings per share for a 2 percent constant currency revenue cut for financial year 2024.

Credit Suisse also mentioned that stock correction is driven by valuations and not EPS. It cited valuations of Indian IT companies are at a large premium to history, despite signifiant correction from their peaks.

Indian IT companies had recovered significantly from their 52-week lows, led by stocks like Persistent Systems which recovered as much as 40 percent, prompting JPMorgan to downgrade the stock just two months after upgrading it.

According to Credit Suisse, Indian IT stocks are currently traded at a 34 percent premium to its 1-year pre-Covid average. That premium narrows to 11 percent for the Nifty 50 and even lower to single-digits for the S&P 500.

Based on this, Credit Suisse sees HCL Tech to be at a high risk of a 20 percent plus valuation correction. Among the other names, it sees a nearly 15 percent risk for Infosys and Wipro and an 8 percent risk for TCS. In fact, HCL Tech at its analyst meet also mentioned that their full year constant currency revenue growth will come at the lower end of the guidance range of 13.5-14.5 percent.

However, Infosys is the only stock on which Credit Suisse has an outperform rating. It has a neutral rating on TCS and HCL Tech, while Wipro commands an underperform rating.

Shares of India's top IT companies are trading 1-6 percent lower. Incidentally, the top five laggards on the Nifty 50 index are technology names.

(Edited by : CH Unnikrishnan)

First Published:Dec 9, 2022 10:47 AM IST