Top IT stocks: IT stocks that could take the spotlight after Q4 results are released

NEW DELHI: The nifty IT Index’s return for the second half of FY22 matched the market, although the first half saw strong outperformance. Brokerage firms said revenue growth momentum and stable margins are key IT stocks in maintaining current ratings. If Ireland-based Accenture’s recent results and its revised outlook for the past two quarters are any indication, momentum in IT stocks could remain strong going forward.

For the upcoming earnings season, keep a close eye on updates on demand, client budgets, deal pipeline, trends in turnover and subcontracting costs.

Tier I companies should post revenue growth in a narrow range of 2.8 to 5.1 percent sequentially on a constant currency basis, with the exception of HCL Tech due to product seasonality, Motilal Oswal Securities said. This brokerage sees Tier II IT players growing somewhere in the 2.5 to 8 percent range.

“We expect the demand outlook to remain strong in FY23, although initial guidance from Infosys, HCL Tech and L&T Tech could have a potential impact on demand from elevated US and European inflation. Companies will continue to report strong growth numbers, which is a tailwind for the industry due to digital and cloud transformation initiatives among enterprise customers,” it said, adding that hiring trends over the past few quarters indicate continued strong demand with good visibility.

Among the major players, Edelweiss expects Infosys and Wipro to post CC revenue growth of 4.3 percent and dollar growth of 4 percent each for Infosys; TCS CC growth is fixed at 3.3 percent, dollar growth at 3 percent. HCL’s CC revenue growth is 2.8 percent and dollar revenue growth is 2.5 percent. Tech Mahindra leads CC growth at 5 percent and dollar growth at 4.5 percent.

Bottom line, Emkay sees TCS profit up 2.3 percent q/q (8.1 percent yoy) to Rs 9,993.90 billion, with an EBIT margin of 25.1 percent. Infosys profit is expected to rise 3.5 per cent QoQ (18.4 per cent YoY) to Rs 6,010 crore with an EBIT margin of 23.5 per cent.

Wipro reports profit up 3.2 percent qoq (3.1 percent yoy) to Rs 3,064.60 crore. Margin for this company is set at 17.5 percent.

HCL Tech posted a 3.4 percent qoq growth (up 39.3 percent yoy) in profit of Rs.3,325.80 crore with an EBIT margin of 18.1 percent. Finally, TechM’s profit is expected to rise 3.7 percent q/q (up 31.2 percent yoy) to Rs.1,418 billion with an EBIT margin of 14.3 percent.

“We would not be surprised if Indian IT companies again beat our and Street’s Q4FY22 estimates,” said Edelweiss.

Emkay expects Infosys to target FY23 revenue growth of 12-15 percent CC YoY with an EBIT margin of 22-24 percent. HCL Tech is expected to target double-digit revenue growth while reducing EBIT margin from 18 to 20 percent. Wipro, which provides a quarterly outlook, can expect CC QoQ revenue growth of 2 to 4 percent for the June quarter. TCS does not provide guidance.

pecking order
Edelweiss said it prefers HCL, Infosys and TCS at largecaps and Coforge, LTI and Mindtree at midcaps. Among small caps, he prefers Zensar, Birlasoft and Firstsource.

Emkay said his pecking order is Infosys, followed by Wipro, HCL Tech, Tech Mahindra, and then TCS among the Tier 1 names. It likes Mphasis, Route Mobile, Birlasoft, eClerx Services, Firstsource Solutions and Persistent Systems in the midcap basket.

Motilal said it prefers Tier I players over their Tier II counterparts given their relative valuation attractiveness and tendency to narrow the valuation gap over time.

“Among the Tier I players, we prefer Infosys, HCL Tech and TCS. We expect Infosys to deliver top-quartile growth, supported by strong deal wins and pricing. HCL Tech is one of the main beneficiaries of large-scale cloud adoption given its expertise in IMS. TCS remains best positioned to benefit from long-term structural tailwinds in technical services and should see relative growth acceleration as a base effect and increased aggression,” it said. Top IT stocks: IT stocks that could take the spotlight after Q4 results are released

Adam Bradshaw

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