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Top 8 IT stocks to BUY ahead of Q2 results, as recommended by HDFC Securities

In light of the prevailing economic situation, the brokerage HDFC Securities expects a strong Q2 performance in the IT sector. The shares of Infosys, Larsen & Toubro Infotech, Mindtree, Mphasis, Persistent Systems Ltd, Cyient Ltd, Sonata Software Ltd and Zen Technologies Limited have a BUY recommendation from the brokerage.

The research analysts of the brokerage firm HDFC Securities said in a note that “the IT sector is expected to deliver a resilient Q2 performance in the context of the current macro environment. Tier-1 IT is expected to achieve sequential growth of 2.4% to 4% CC The severity of the impact across currencies will be similar to the previous quarter with a sequential impact of -1.3% to -1.8% for Tier 1. Although a larger band (0 .9% to 5.3% qoq), mid-tier IT (vs. Tier-1) outperformance is expected to continue in Q2 with Tata Elxsi, Mindtree and Persistent expected to lead with a above-average single digit sequential growth Supply-side normalization (monthly decline in job openings and job indices) can be viewed as positive from an operational/margin perspective Despite macro challenges in Europe, contract activity remains strong (TCS-M&S, Boots, Nokia, Zurich Insurance; Infosys-Telenor, LTTS-BMW, ​​Persistent-Monument Bank). Accenture’s outsourcing bookings are at an all-time high (also impacted by longer deal maturities) and the top end of the earnings guide also indicates demand is resilient.”

Company Recommendation Target price in Rs
TCS TO ADD 3.620
infosys TO BUY 1,790
HCL technologies TO ADD 1,125
wipro TO ADD 470
Tech Mahindra TO ADD 1,080
Larsen & Toubro Infotech Ltd TO BUY 5,270
Tata Elxsia TO SELL 6.700
Mindtree Ltd TO BUY 3.930
Mphasis Ltd TO BUY 2,900
Persistent systems TO BUY 5.025
Cyient Ltd TO BUY 925
Sonata Software Ltd TO BUY 650
Mastek Ltd REDUCE 1850
Zensar Technologies Ltd TO BUY 300
Source: hdfcsec.com
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“With GBP, EUR down nearly 10% since last quarter, exacerbated by Yen and AUD, currency volatility will negatively impact Q2 and Q3FY23E performance. For Tier-1 IT, we are building CC growth moderation to 13% for FY23E (~400bps negative impact across currencies) and 10% CC growth for FY24E (~1% negative impact across currencies) compared to 18% growth recorded in FY22. Infosys is likely to maintain its forecast of 14-16% CC for FY23E and HCL Tech is expected to maintain its growth forecast of 12-14% for FY23E. Wipro’s growth forecast for the third quarter is likely to be 1-3% CC QoQ and LTTS is expected to maintain its growth of 14.5-16.5% CC for FY23E,” she added.

“We think margins bottomed out in the first quarter after adjusting for >400bps since the post-covid peak levels (Q3FY21) and trailing ~100bps lower from pre-covid. We are building margin 100 basis points below pre-covid for FY23E and some recovery in FY24E (pre-covid) supported by the medium term wind of normalization in churn/sub-con, usage and pricing. Wage impact and currency conversion will impact margin in the second quarter, offset by the absence of visa fees, INR write-offs, improved utilization and efficiency. We believe there is a low downside risk to margin even in the event of rapid demand moderation,” they said in a research report.

“IT Index P/E multiples are down 35% YTD, with earnings down ~6%. While the P/E rating was led by macro risk to growth (FY24E), profit cuts were driven by margin squeezes as the slowdown between growth and the operating structure normalized. The margin of safety is higher for tier-1s, with valuations near the 10Y average (compared to >40% premium at the end of CY21). The resilience of mid-tier IT is reflected in the continued growth premium (>500bps growth premium of mid-tier IT vs. tier-1 over FY22-25E) and virtually unchanged consensus revenue estimate (2% decrease vs. 7% average decrease for tier – 1 in the last 3M). We roll over target valuations to June 24E EPS and reset USD-INR estimates. Stick to our constructive stance on the sector and the near-term volatility presents strong absolute returns opportunities,” the research analysts said.

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The views and recommendations made above are those of individual analysts or brokerage firms, not Mint.

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