Tough time for IT stocks as TCS, Mindtree issue earnings warning; Here is what brokerage houses are saying

IT stocks are in the news this month after Mindtree and Tata Consultancy Services (TCS) turned cautious on the sequential growth in Q2 earnings. Mindtree on September 2 informed bourses that it expects Q2 FY17 revenue to be lower than the previous quarter. Since September 1, Mindtree and TCS slipped by 6.36 per cent and 2.42 per cent to Rs 520.05 and Rs 2,447, respectively, till September 7. However, other IT majors such as HCL Technologies, Tech Mahindra and Infosys gained 0.33 per cent, 0.43 per cent and 1.67 per cent, respectively, during September 1-7.

Mindtree is expecting weakness due to cross-currency movements, project cancellations and slower ramp-ups in a few large clients across different verticals and continued weakness in its UK-based subsidiary Bluefin. On the other hand, TCS in a BSE filing said, “Based on the at the end of August 2016, the company has characterised customer outlook as one marked by abundant caution, with some holding back of discretionary spending – particularly in the BFSI vertical in the United States – resulting in a sequential loss of momentum.

Market experts are not looking very much bullish on the sector. G Chokkalingam, founder, Equinomics Research & Advisory said, “One can consider mid-cap IT companies in the present market scenario rather than large cap. We are bullish on Mphasis and Sasken Communication.”

Gaurav Dua, head of research, Sharekhan said, “We have de-rated the whole IT sector because of the two reasons, firstly growth will remain moderate for the next few quarters and we may see severe pricing pressure in legacy work. We have neutral rating on TCS, HCL Technologies and Infosys.”

On Tata Consultancy Services, brokerage firm IDFC Securities believes slower topline growth momentum and cross currency impact could sap momentum after soft Q1. It has downgraded the TCS target price to Rs 2670 from Rs 2770 earlier. However, IDFC Securities maintained ‘outperformer’ rating for TCS shares.

Last month, Infosys CEO Vishal Sikka also also said that there are “uncertainties across sectors, geographies”.

On Thursday (September 8), Nifty IT index was trading nearly 3 per cent down in the noon trade. All the components in the index were also trading in red after the cautious outlook given by TCS in the morning trade. IT majors such as TCS, Tech Mahindra, Infosys, HCL Technologies and Wipro were trading down between 1.80 per cent and 6 per cent.