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Citi recommends selling as many as three IT services stocks ahead of October to December 2024 quarter earnings data, which is set to be released January 2025 onwards. Even as the American brokerage sees up to 17% downside in the tech shares, the commentary is not too negative as it has highlighted green shoots in demand and margin levers.
The shares of Tata Consultancy Services (TCS), Tech Mahindra and LTIMindtree are ones on which Citi has maintained its sell call and expects a downside of 12%, 17% and 14%, respectively, from the closing price of December 13.
For TCS, the brokerage says smaller discretionary deals are emerging but they face return on investment (RoI) scrutiny and that mega deals are being divided into smaller contracts. The UK and Europe have softer demand compared to North America. Meanwhile, reduced subcontracting costs are a result of strategic decisions rather than market conditions, the brokerage noted.
On the outlook, it noted that the company aims to achieve an aspirational margin band of 26-28%.
Commenting on specific projects, it said, the BSNL project for TCS is expected to be stable to slight decline in Q3 and start tapering off post that.
Tech Mahindra, Citi says, is doubling down on key verticals including telecom, manufacturing (particularly automotive and industrial), BFSI, healthcare and life sciences. The brokerage also noted that the focus is more on building capabilities in Cloud, AI and Automation, and Enterprise Applications.
According to Citi, the key margin levers for Tech Mahindra are pyramid improvement, pricing optimisation, reducing subcontracting costs, and improving utilisation rates.
For LTI Mindtree, the brokerage believes the BFSI vertical has seen an uptick in demand and continues to hold that. The retail, consumer goods, healthcare, and manufacturing are seeing a pick up in deals whereas the tech vertical is a mixed bag, with some accounts performing well while others tighten budgets.
The company is deferring margin improvement targets to prioritise other strategic initiatives. Among key margin levers are SGA optimisation, pyramid correction, and operational cost, it said, adding that the company has done enough work to be comfortable that it will meet targets.
At 11:45 am, LTI Mindtree shares traded 0.4% higher at ₹6,744.05, Tech Mahindra was more than a percent lower at ₹1,774.85 and TCS was also down a percent at ₹4,432.15 on NSE.
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| Company | Value | Change | %Change |
|---|
The shares of Tata Consultancy Services (TCS), Tech Mahindra and LTIMindtree are ones on which Citi has maintained its sell call and expects a downside of 12%, 17% and 14%, respectively, from the closing price of December 13.
| IT stock | Rating | Target price |
| Citi | Sell | 3935 |
| Tech Mahindra | Sell | 1475 |
| LTIMindtree | Sell | 5710 |
For TCS, the brokerage says smaller discretionary deals are emerging but they face return on investment (RoI) scrutiny and that mega deals are being divided into smaller contracts. The UK and Europe have softer demand compared to North America. Meanwhile, reduced subcontracting costs are a result of strategic decisions rather than market conditions, the brokerage noted.
On the outlook, it noted that the company aims to achieve an aspirational margin band of 26-28%.
Commenting on specific projects, it said, the BSNL project for TCS is expected to be stable to slight decline in Q3 and start tapering off post that.
Tech Mahindra, Citi says, is doubling down on key verticals including telecom, manufacturing (particularly automotive and industrial), BFSI, healthcare and life sciences. The brokerage also noted that the focus is more on building capabilities in Cloud, AI and Automation, and Enterprise Applications.
According to Citi, the key margin levers for Tech Mahindra are pyramid improvement, pricing optimisation, reducing subcontracting costs, and improving utilisation rates.
For LTI Mindtree, the brokerage believes the BFSI vertical has seen an uptick in demand and continues to hold that. The retail, consumer goods, healthcare, and manufacturing are seeing a pick up in deals whereas the tech vertical is a mixed bag, with some accounts performing well while others tighten budgets.
The company is deferring margin improvement targets to prioritise other strategic initiatives. Among key margin levers are SGA optimisation, pyramid correction, and operational cost, it said, adding that the company has done enough work to be comfortable that it will meet targets.
At 11:45 am, LTI Mindtree shares traded 0.4% higher at ₹6,744.05, Tech Mahindra was more than a percent lower at ₹1,774.85 and TCS was also down a percent at ₹4,432.15 on NSE.
Track latest stock market updates on CNBCTV18.com’s blog here
First Published: Dec 16, 2024 12:03 PM IST
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