Analyst tracker: Why Infosys was most upgraded IT stock in one month while LTIMindtree was most downgraded

Information technology giant Infosys was the most upgraded stock in one month (ended January 31, 2024), according to Moneycontrol's analyst tracker, while LTIMindtree featured as the most downgraded.

This comes after both companies reported their earnings for the quarter ended December 2023. Both the companies' Q3 results came in below Moneycontrol's poll estimates.

However, Infosys saw upgrades as analysts expect its growth to accelerate in FY25 on account of the ramp-up of large deals, strong deal pipeline, and expected recovery in discretionary spending.

Meanwhile, LTIMindtree was downgraded as brokerages expect near-term weakness for the IT major. Its margins are likely to be impacted in the near term due to re-investment in business and transition costs of large deals.

According to the Moneycontrol analyst tracker, the 'buy' calls on Infosys went up from 23 to 30 over one month and the 'hold' call fell from 14 to seven. The 'sell' call on the counter remained unchanged at eight.

In contrast, LTIMindtree saw its 'buy' calls go down from 20 to 12 over a month and 'sell' calls jump from 11 to 17 during this period. The ‘hold' rating on the counter increased by one to 12.

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Why analysts are positive on Infosys

Infosys' Q3 earnings were the first set of decent results after back-to-back disappointments. Its deal wins in the quarter, while modest, had a high share of net new deals (71 percent), which should boost growth for FY25 and beyond, according to Nuvama Institutional Equities.

Analysts at the brokerage believe that Q3 could be the bottom for the earnings downgrade cycle for Infosys, and it expects strong deal wins of the last few quarters to convert into revenue even as the US macro environment becomes favourable.

Infosys management’s margin improvement program, project Maximus, is creating impact and gaining traction. Thus bringing confidence in the medium term for improvement in margins.

Margin levers going forward include improving utilisation levels, pyramid optimisation, increasing offshore effort mix, GenAI automation and better pricing, according to analysts.

Despite the ongoing macroeconomic headwinds, Infosys has managed to execute better than expected, which should help the company in its growth beyond FY24E, said KR Choksey in its report.

The IT giant's margin improvement plan and focus on GenAI, cloud and other services seem promising and could help generate superior returns, according to the brokerage.

Analysts at Sharekhan also believe that the large deal signings and continuity of renewals will gain further traction as macro headwinds recede, improving earning visibility for FY25/FY26E.

Geojit Financial Services said that healthy deal wins and acquisitions would continue to support Infosys' earnings performance in the medium to long term. Additionally, sustained cost minimisation efforts will continue to limit any downfall in margins

Why analysts downgraded LTIMindtree

LTIMindtree's Q3 earnings missed the Street's estimates on all major fronts. In addition, a weak management commentary triggered a cautious outlook from brokerages that anticipate more pain for the company, going ahead.

International brokerage Nomura sees no signs of a significant demand revival yet for LTIMindtree.

The IT major delayed its ambition to achieve a 17-18 percent operating margin by a few quarters on account of hiring. This did not sit well with several brokerages. HSBC feels LTIMindtree's worsened Q4 outlook and a pullback on its margin ambitions suggest medium-term portfolio headwinds.

Analysts at Nuvama Institutional Equities also feel that LTIMindtree's management commentary did not exude much confidence as the company grapples with delayed decision-making and weak macros.

Motilal Oswal Financial Services noted that the near-term slowdown in discretionary spending and its meaningful exposure to BFS (banking and financial services) would have an adverse impact on LTIMindtree's growth performance.

Additionally, the decision to delay the 17-18 percent aspirational band by three to four quarters indicates limited room for further cost optimisation and the front-ended impact of a large deal scaling up in the near term, the brokerage said.

According to Elara Capital, some headwinds from furloughs, higher pass-throughs and moderation in utilisation may persist, going forward. This may limit margin rebound in Q4FY24. The next quarter's outlook suggests a gradual recovery from furloughs and continued pass-through revenues.

Analysts are cautious about overall demand due to delayed decision-making and with many clients yet to finalise their budgets. Also, discretionary projects have not ramped up as expected, indicating a lag in decision-making, particularly in the company’s discretionary portfolio.

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