Jefferies Downgrades Tech Mahindra, TCS On Margin Woes; Hikes Infosys, HCL Tech Price Targets
An employee talks on the telephone at the Wipro headquarters (Photographer: Namas Bhojani/Bloomberg)

Jefferies Downgrades Tech Mahindra, TCS On Margin Woes; Hikes Infosys, HCL Tech Price Targets

Indian software services exporters are well-positioned to deliver strong revenue growth in the ongoing financial year but wage pressure and post-Covid cost normalisation may drive margins lower and drag earnings, according to Jefferies.

The growth outlook for Indian IT services remains strong driven by three tailwinds, the research firm said in a note.

  • First, the acceleration of digital transformation and cloud adoption is set to continue.

  • Second, the rise in IT outsourcing in the wake of an economic shock should help boost the addressable market.

  • Third, market share gains for Indian IT firms should continue to be led by a growing presence in markets like Europe.

“While our bottom-up analysis suggests 14-16% aggregate U.S. dollar revenue growth in FY22, we project 17% dollar revenue growth in FY22 followed by 10% in FY23-24,” Jefferies said.

The research firm, however, expects aggregate EBIT margin for the top five Indian IT firms to fall to 22% in FY23-FY24 from 23.4% in Q4 FY21.

“Our sensitivity analysis suggests that our margin assumptions could be lower by 200-300 basis points if all operating metrics were to revert to pre-Covid levels,” it said. “We cut our earnings forecasts by up to 10% on lower margin assumptions and expect IT firms to deliver 12% earnings CAGR versus 13% INR revenue growth in FY21-24. Our EPS estimates are 3-7% below consensus.”

Jefferies also sees limited scope for further re-rating as the top five IT stocks are trading at premiums of 44% and 52% to their five and 10-year averages, respectively, and at a decade-high 30% premium to the Nifty.

The research firm suggested a ‘buy’ for Infosys Ltd. and HCL Technologies Ltd., while downgrading Tata Consultancy Services Ltd. and Tech Mahindra Ltd. Jefferies maintained its ‘underperform’ rating on Wipro Ltd. as the company has the lowest earnings-per-share growth in its coverage and rich valuations.

Here’s what Jefferies has to say about the Indian IT stocks...


  • Maintains ‘buy’, raises target price to Rs 1,750 from Rs 1,600 apiece, implying a potential upside of 12%.

  • Infosys’ timely scale-up of digital capabilities and focus on large deals has helped deliver sector-leading growth in FY18-21, and will continue to drive its growth leadership

  • Forecasts a 90-basis-point margin decline in FY21-24E due to cost normalisation; lowers earnings estimates by 1-2%.

  • Still sees Infosys delivering a 13% earnings per share CAGR in FY21-24E.

  • Infosys has had a sharp rerating and has narrowed its discount to TCS to a mere 5%.

  • Its growth leadership should support premium valuations.

  • Potential downside risks include weaker revenue growth, lower margin, unfavorable currency, and corporate action.

HCL Tech

  • Maintains ‘buy’ rating, hikes target price from Rs 1,150 to Rs 1,180 apiece, implying a potential upside of 20%.

  • HCL Tech is favourably positioned to deliver 10.6% year-on-year revenue growth in FY21-24, led by a pickup in IT services and a recovery in engineering, research and development services.

  • Expects margins to fall 150 basis points in FY21-24 due to its planned investments, potential impairments in the products and platforms business and normalisation of costs in FY21-24.

  • HCL Tech offers healthy growth at a 35-40% discount to TCS/Infosys and reasonable rerating potential.

  • Potential downside risks include weaker organic revenue growth, lower margin, value-destructive acquisitions, and adverse forex movement.

Tech Mahindra

  • Downgrades to ‘hold’, lowers price target to Rs 1,200 from Rs 1,230, still implying a potential upside of 10%.

  • Over FY21-24, it expects Tech Mahindra to deliver 9% revenue CAGR driven by a pick-up in communications vertical on the back of 5G opportunity and continued growth in the enterprise vertical.

  • Tech Mahindra has delivered stellar margin performance in FY21, however, the research house sees margins declining by 180 basis points to 14.7% in FY21-24.

  • Key downside risks include weaker-than-expected margin; negative news flow on 5G; deceleration in growth in other verticals; currency.

  • Key upside risks include stronger-than-expected margin; faster-than-expected ramp up of 5G; market share gains, especially in communication vertical; a sharp pickup in growth in enterprise verticals; and favorable currency movement.


  • Downgrades to ‘hold’, cuts target price to Rs 3,570 from Rs 3,740 apiece, still implying a potential upside of 7%.

  • Expects TCS to deliver an 11.8% CAGR in revenue, driven by a strong order book and its superior client mining abilities.

  • TCS’ current multiples leave limited scope for re-rating.

  • Key downside risks include increase in corporate tax rates in the U.S., slower-than-expected deal momentum, higher-than-expected margin decline and adverse currency moves.

  • Key upside risks include stronger-than-expected deal momentum, high margin resilience, favourable currency movement.


  • Maintains ‘underperform’ rating, raises price target to Rs 470 from Rs 380, still implying a potential downside of 13%.

  • Improvement at Wipro is more than priced in. Wipro’s reorganisation under new management seems to be working well, with the company stepping up on deal wins. The research firm expects it to deliver 13% growth CAGR in FY21-24.

  • Sees margins contracting 170 basis points in FY21-24 to 17.7% due to the Capco acquisition and normalisation of costs.

  • Potential upside risks include longer-than-expected organic revenue growth; better margin; value-accretive acquisitions; and favourable forex movement.

The five IT stocks were trading between 0.47% and 1.20% lower, with TCS losing the most, around noon on Friday. That compares with a flat Nifty 50.

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