JP Morgan bearish on IT, asks investors to sell into the rally

JP Morgan said investors should sell into the recent rally in shares of information technology companies, citing expensive valuations and pressure on margins.

"We turn more bearish on the sector and highlight structural margins rather than growth slowdown should be key sector concern," said the brokerage's analysts Ankur Rudra and Bhavik Mehta in a note to clients. JP Morgan, which had an 'underweight' rating on the IT sector, downgraded , , and Persistent to neutral.

"Valuations significantly above LT (Long Term) averages," said JP Morgan's analysts. "NSE IT (index)has underperformed the Nifty by 25% YTD but valuations remain expensive - crucially sharply above pre-Covid levels even as peak growth is behind and margins have structurally eroded."

NSE's IT index has gained 10% since June 17 when the Nifty hit a 52-week low. Nifty rose 15% in the period.

"Sharp margin misses across scale IT services vendors in the June quarter were deeper than feared with incremental growth coming at lower margins," said JP Morgan's analysts. "We expect the margin erosion to persist in the medium term and stay meaningfully below LT (Long Term) trends due to reversal in employee-employer bargaining power, underwhelming graduate uptake, limited price increases, return in travel/facility costs and high onsite inflation."