IT stocks like Coforge, HCL Tech might have soared on PE expansion over past year, but challenges persist: Nirmal Bang
Persistent Systems (up nearly 86 per cent), Coforge (up 55 per cent), L&T Technology Services (up 53 per cent) and HCL Technologies (up 53 per cent) have seen strong gains over the last year despite persisting concerns over weakness in demand in key markets in the West. Also Read: Indian stock market remains attractive, say experts, suggest stocks to buy for long term While it appears investors are placing greater emphasis on the valuation multiples rather than the actual earnings growth of the IT companies, strong domestic inflows into equities could be another factor behind the rise in IT stocks, said the brokerage firm.
"While some in the market believe that PE multiple expansion is a precursor to the start of a consensus earnings upgrade cycle for FY25/FY26, we remain sceptics. We believe it has more to do with strong domestic inflows into equities," said Nirmal Bang.
"The tier-2 PE premium of 32 per cent currently versus the tier-1 is due to the skewed inflow into mid-cap mutual funds as much as because of better future growth prospects," the brokerage firm added. The brokerage firm underscored that the market is assuming the next financial year (FY25) to be slightly better than FY24 and there would be a pent-up demand-driven revenue spike in FY26.
While the PE multiples may require a material upgrade to FY25 and FY26 estimates for meaningful returns, the brokerage firm sees limited scope for a material upside to the earnings estimate in FY25 and FY26 due to elevated interest rates and uncertainty around the economic policies in the US. Also Read: IT sector outlook: Worst may not be over; Nirmal Bang sees earnings downside risk for FY25-26 "Going by the second half of the year 2024 recovery talk by most IT players,
. Read more on livemint.com
