Irrational Exuberance – IT Companies – Merrill

BoFA Merrill Analysts have taken a contrarian view against the streets and have come up with a bold report and have recommended a UNDERPERFORM on the Indian IT Sector.

Software stocks have rallied sharply and consensus is now positive. Bofa-ML said, sector will Underperform and believe the market will be disappointed in the near term,on margins and in the longer term on revenue growth trajectory. Unlike consensus, we expect margins to decline in FY11, not only due to Rupee appreciation but due to likely rise in wages, ahead of pricing recovery and a pick up in discretionary S&M costs. Structurally, we expect slower revenue growth going ahead on slower expansion of addressable market and greater competitive

BOFA-Merrill has U/perform ratings on the top four Indian IT stocks, and see
the highest valuation-led downside for Infosys of ~25%.

BOFA-Merrill Target Prices are as follows,
TCS – 520
Infosys – 1800
Wipro – 490
HCL Technologies – 275
Tech Mahindra – 910
Hexaware – 75