Axis Capital upgrades eight IT stocks citing these three factors but downgrades Wipro, TechM

Brokerage firm Axis Capital has upgraded eight IT services providers, TCS, Infosys, HCLTech, LTM, Persistent Systems, Coforge, Hexaware Tech, and Zensar Technologies, on Wednesday, June 24, the same day as JPMorgan had downgraded HCLTech, Wipro and Tata Technologies in a separate note.

The brokerage has cited three important reasons behind its upgrade of these stocks:

First, Axis Capital argues that AI is not the primary driver for the sluggish growth observed by these companies over financial year 2024-2026. Instead, data indicates that the demand slowdown actually preceded the widespread launch of meaningful AI models.

AI Targets May Fall Short

While AI-driven coding productivity is a popular theme, Axis Capital cautions that it alone cannot deliver the substantial $510 billion to $1.3 trillion in revenue that AI firms are targeting.

The report emphasizes that broader enterprise adoption across mid-office and back-office functions is essential, a transformation for which IT services firms will serve as indispensable implementation partners.

EPS Growth May Continue

Even as the US Dollar revenue grew at a Compounded Annual Growth Rate (CAGR) of 2.1% between financial year 2024-2026, the Nifty IT index managed a 10.4% EPS CAGR during this same period, aided by very high revenue retention rates. For financial year 2027-2029, the street is working with an EPS CAGR estimate of 7.3%.

Axis Capital's Investment Strategy

Axis proposes a "Barbell Strategy" for investors. On one end, they recommend focusing on the "maintenance moats" provided by industry leaders like TCS, HCLTech, and Infosys. On the other end, they suggest targeting "challenger" or "AI-native" firms such as Coforge, Persistent, and LTM.

Among its recommendations, the brokerage sees the highest upside for Coforge, as its ₹2,140 price target comes with an upside potential of 63%.

On the other hand, it has downgraded shares of Mphasis to "sell" from its earlier rating of "buy", stating that the company is paying customers upfront cash savings over the life of the deal to win contracts.

Besides Mphasis, Axis Capital has also downgraded Wipro to "reduce" from its earlier rating of "add", and Tech Mahindra to "sell" from "add".