Sell Infosys, Wipro stocks as they are 'highly exposed' to earnings risks, analyst says

By Tomi Kilgore

Both India-based IT services company were initiated at underweight at J.P. Morgan given exposure to discretionary spending

J.P. Morgan slapped bearish ratings on both Infosys Ltd. and Wipro Ltd., citing concerns that the "high exposure" the India-based information technology services companies have to discretionary spending leaves them "highly exposed" to downside earnings risks.

Analyst Ankur Rudra initiated coverage of Infosys with an underweight rating with a target for the U.S.-listed shares of $14. That target, which implies about 10% downside from current levels, made Rudra the most bearish of the 53 analysts surveyed by FactSet who cover the company.

Rudra noted that the fiscal 2024 guidance Infosys provided in mid-April -- of revenue growth of 4% to 7% in constant currency and operating margin of 20% to 22% -- were below his expectations, which were already the lowest on Wall Street. implies an "aggressive ask rate" of 1.6% to 2.7% compound quarterly growth rate for the next four quarters.

"We find the dependence on unsigned mega-deals for the upper end and the 2H weighting of expectations prone to subsequent downgrades," Rudra wrote in a note to clients. "Infosys has lost growth leadership despite persistently slipping margin targets, below-peer cash conversion and a loss of senior management muscle to competition."

Infosys' stock (500209.BY) rose 0.5% in morning trading. It has tumbled 13.4% year to date, while the iShares MSCI India exchange-traded fund (INDA) has slipped 1.3% and the S&P 500 index has gained 7.0%.

Of the 53 analysts that cover Infosys, 10 were bearish, while 28 were bullish and 15 were neutral. The average price target for the American depositary shares (ADS) was $18.12, which implies about 16% upside from current levels.

Rudra also started coverage of Wipro at underweight, while his stock price target of $4.30 implied roughly 9% downside from current levels. He noted the company's revenue outlook for the current quarter, provided last month, of a decline of 3% to 1% was also below his forecasts.

"Management's aim to hold margins at 16% in FY24 appears optimistic to us in a weak growth environment," Rudra wrote. "Our negative view is driven by high discretionary exposure and earnings risk, even if multiples are reasonable."

Wipro's stock rose 0.4% in morning trading, and has gained 1.5% year to date.

Of the 45 analysts surveyed by FactSet who cover Wipro, Rudra was one of 17 who were bearish, while only 11 were bullish. Another 17 were neutral. The average price target was $4.74, which was in line with current levels.

Rudra's bearish calls on Infosys and Wipro came as part of a bearish view on the IT services sector, amid a plunge in discretionary spending on technology.

"Several industries, led by TMT [technology, media and telecommunications] and BFSI [banking, financial services and insurance], are moderating tech spend after a few years of above-trend spending over the pandemic period," Rudra wrote. "This has led to a sharp correction in discretionary spending, project halts, ramp-downs and delays in decision-making."

He also was concerned about emerging risks on pricing, "sticky" wage inflation and reversing travel costs, which increases risks that margins will fall.

-Tomi Kilgore

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05-24-23 1123ET

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