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IT sector check – Sell into ‘delayed landing’ outperformance, Nirmal Bang

We continue to reiterate our bearish stance on the Indian IT Services sector, which we had initiated in early April 2022 (Downgrade). Through this report, we also initiate coverage on LTIMindtree Ltd., Mphasis Ltd. and Coforge Ltd.

We believe that the Nifty IT’s outperformance vs the Nifty by ~7% since September 30, 2022 till date has largely been driven by the ‘delayed landing’ narrative that has developed around resilience of the U.S. economy along with better growth prospects for both Europe as well as China in 2023 compared to earlier expectations.

However, the narrative has turned very fluid post the problems that have surfaced in the banking sector in both U.S. as well as Europe in the last fortnight. Early signs of economic stress are beginning to emerge from the fastest increase in Fed funds rate in recent history. This in our view will lead to at least our base case of a shallow recession in the U.S., if not something worse playing out by H2 2023.

The potential impact of the recent banking stress in the developed markets has not been incorporated in our estimates, which broadly remain unchanged since Q3 FY23 results season.

Our U.S. dollar revenue growth estimates for tier-I IT companies for FY24 are still in low to mid-single digits with downside risks while consensus is anticipating high single-digit growth, implying a belief in the ‘soft/no landing’ narrative. Bloomberg

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