HSBC’s Upgrade of TCS and Downgrade of Infosys After Q3 Results

The firm’s report highlighted that margins fell short of estimates for mid-tier companies. The third-quarter results were a mix for IT companies. Top-tier companies like Tata Consultancy Services Ltd., Infosys Ltd., HCL Technologies Ltd., and Wipro Ltd. exceeded expectations, while Tech Mahindra Ltd., LTIMindtree Ltd., Mphasis Ltd., and Coforge Ltd. reported lower-than-expected results, according to HSBC.

TCS was upgraded to a ‘buy’ rating, while Infosys’ rating was downgraded to ‘hold’ due to concerns about growth normalization and high market expectations for FY25. Despite Infosys’ struggle in the previous year, HSBC remained optimistic about 2023 due to potential business normalization and a valuation difference with TCS. Mid-tier IT services encountered challenges in profitability, mirroring pre-Covid-19 trends with softer demand.

HSBC Global Research favored top-tier IT and mid-tier specialized ER&D players over mid-tier IT services in 2024. The third quarter appeared to be the bottom of the slowdown, with stocks responding positively. However, continued performance from current levels relies on the extent of the pickup in FY25.

Other sectors, such as manufacturing, healthcare, and energy, performed reasonably well. The anticipated pickup in FY25 is heavily reliant on banking and retail sectors. Large banks’ financial results and commentary did not lead HSBC to be optimistic about a significant increase in spending.

Consequently, the growth forecast for FY25 remains within the range of 6–7%. The stock price was almost at its buyback price of Rs 4,150, with the buyback ending on Dec. 7, 2023. Out of 44 analysts tracking the company, 23 maintain a ‘buy’ rating, 11 recommend a ‘hold,’ and 10 suggest a ‘sell’, according to Bloomberg data.

The average 12-month analysts’ consensus price target implies a 2.6% downside.