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JPMorgan analysts downgrade Indian IT companies on margin erosion concerns

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Hispanolistic

JPMorgan analysts, Ankur Rudra and Bhavik Mehta, downgraded several companies in the Indian IT sector with an Overweight rating to Neutral, and reiterated its Underweight stance, saying structural margin erosion is the key risk to estimates.

The companies that were downgraded are Infosys (INFO IN) (INFY), Tech Mahindra (TECHM IN), Mphasis (MPHL IN) and Persistent Systems (PSYS IN).

The analysts have rated Tata Consultancy Services (TCS IN), HCL Technologies (HCLT IN), Wipro (WPRO IN) (WIT), L&T Infotech (LTI IN), Mindtree (MTCL IN), L&T Technology Services (LTTS IN) and Tata Elxsi (TELX IN) as Underweight.

The sector is seen to have “limited incremental margin levers” to fight wage increases, persistent retention costs, subcons and higher travel/facility costs.

The analysts expect margin erosion to persist in the medium term and stay meaningfully below the long-term trends, according to a report on the Indian technology, internet and telecoms sector.

Structural margins, rather than growth slowdown, should be the key sector concern, according to the report.

The analysts, however, are optimistic about FY23-24 margin expectations.

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