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HSBC has upgraded Infosys, LTIMindtree and Mphasis to buy while it recommends holding Wipro. Meanwhile, it has downgraded TCS and Coforge to hold and Tech Mahindra to reduce.
“Within IT, when it comes to stock selection, it is is a case of balancing growth and valuations. We are less constructive on mid-ter companies as their growth is decelerabrig but valuations remain rich,” the brokerage said.
HSBC noted that its preferred picks are Infosys, LTIMindtree, HCLTech (Hold) and Mphasis.
The sectoral Nifty IT index traded almost a percent higher on December 10 with Infosys, LTIMindtree and Wipro among the top gainers trading nearly 2% higher. Apart from Tech Mahindra in the red, all others traded more than a percent higher.
IT industry growth likely at 6-7% in FY26
It expects the industry growth to pick up to 6-7% in FY26 from 3- 4% in the past two years, led by a recovery in the US market. However, weak outlook for Europe and GenAI uncertainty are likely to restrict the upside, it said.
Other than that global capability centre (GCC) headwinds, although moderating, are likely to continue. Favorable low base of past two years and idiosyncratic company and valuation differences are expected to have an impact on growth too.
“Overall, we expect the IT sector to perform at least in line with market in 2025 Improving growth should attract investor interest away from some other sectors, where the demand outlook is detenorating but valuations are high,” the brokerage added.
Explaining the global scenario, HSBC said, US demand outlook is positive, led by an improving macro backdrop, especially for banking and retail, and supported by a low base, the top five companies added $1.5-2 billion in incremental revenues over the past two years versus the historical average of $5 billion. “In Europe, demand is weakening, offsetting some of the upside from the US market.”
No new powerful tech drivers
From a broader perspective, HSBC said that unlike last three mega upcycles since 2009, it doesn’t see any powerful new business or tech drivers.
“Meanwhile, tech adoption of GenAl has been faster in 2024 compared to business GenAl and that’s a negative for Indian IT over the short term. We expect business GenAl projects to pick up by next year. Finally, GOCs continue to grow and take market share from Indian IT, but these gains are moderating.”
What to expect from earnings
Most operating metrics like utilisation, offshore mix-are at peak levels, so as growth improves margin pressure is likely to increase next year, HSBC said.
“We think the key here is to adjust the pyramid-the corporate staff structure by hiring younger engineers to reduce costs.”
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However, this is a long process and is unlikely to be immediately margin accretive Overall, it expects margins to remain at 2024 levels. Rupee weakness is a key upside risk to margins and EPS, the brokerage added.
