Nomura Forecasts ‘Anaemic’ Growth for IT Firms in FY27; Unveils New Target Prices for Infosys, TCS, and More.
As the Q1 earnings season approaches, Nomura’s analysis presents a cautious outlook for Indian IT companies, particularly the large-cap firms, citing a “perfect storm” of near-term challenges hindering growth. Key factors contributing to this uncertainty include geopolitical tensions, especially in the Middle East, and fluctuating interest rates in the United States, which have dampened client spending across the board. This subdued spending environment is further exacerbated by increased competition in the IT services sector, particularly when tech budgets remain stagnant, thereby limiting the ability for substantial growth. The brokerage forecasts a muted performance in the upcoming earnings reports, with Wipro expected to lead in weakness, potentially posting a decline of -1.3%, while Tech Mahindra shows slight resilience at a 1% growth rate.
Nomura projects that mid-cap IT firms will continue outperforming their larger counterparts, a trend likely to persist as earnings guidance from major players like Infosys and HCL Tech is expected to remain unchanged. The report notes a downward adjustment in revenue growth estimates of 100 to 200 basis points for FY27-28, underscoring overall bearish sentiment regarding near-term earnings. Additionally, the firm suggests that Wipro’s guidance for Q2 FY27 may span a narrow range of -1% to +1%, reflecting the ongoing pressures facing the sector.
Despite these immediate challenges, Nomura advocates for the long-term potential of the Indian IT market. The brokerage countered the prevailing fears regarding the supposed threat posed by artificial intelligence to IT services, arguing that the complexity of integration within enterprises suggests a diminishing risk of rapid displacement. By drawing parallels to the extensive effort underlying advancements in autonomous vehicle technology, Nomura posits that a critical role remains for system integrators in AI-dominated environments. Thus, while current market conditions suggest a deflationary phase, the potential for Indian IT firms to expand their total addressable market by leveraging operational spending offers a pathway for future growth.
In light of these insights, Nomura has revised its target prices for IT stocks downward by up to 20%, adjusting its rating on Tech Mahindra from ‘Buy’ to ‘Neutral’. The brokerage believes that long-term confidence in AI could eventually bolster multiples for the sector. Noteworthy investment picks include Infosys and Cognizant in the large-cap space, and Coforge and eClerx among mid- and small-cap firms, respectively. This nuanced view reflects an acknowledgment of both the challenges and the latent opportunities that exist within the Indian IT landscape as the sector navigates a transitional phase.
Source: The Economic Times
(Expert Note: This report was prepared by the Wealthova team.)