Infosys, TCS, Wipro, TechM, Mphasis shares: IT stocks that analysts like ahead of Q1 results

June quarter earnings are just a couple of weeks away and analysts are largely pencilling in a muted earnings season for domestic IT players, following weak commentaries by Accenture, EPAM and a few other global peers.  ICICI Securities is fresh to jump on the bandwagon. It even feels that June quarter may be softer than the current consensus expectations, following its discussion with IT companies and Accenture’s August quarter guidance.

To recall, Accenture’s August quarter guidance implied no sequential improvement, moderation in cloud growth for hyperscalars, muted total contract value (TCV) growth in Q4FY23 and declining headcount.  The US-based EPAM Systems also cut its Calendar 2023 revenue growth outlook, expecting a 2 per cent decline in revenues in the constant currency terms at the mid-point of the guided band.

For FY24, Infosys guided for FY24 revenue growth of 4-7 per cent in CC terms. HCL Technologies guided for 6-8 per cent growth, with IT services expected to grow at 6.5-8.5 per cent. Wipro, on the other hand, suggested a June quarter CC sequential growth of minus 3 per cent to minus 1 per cent.

Nifty IT is currently trading at 21 times one-year forward EPS against the last 15-year average of 18 times. The IT index is trading at a 16 per cent premium over Nifty PE of 18.5 times. However, 1-year forward EPS growth of Nifty IT index at 7 per cent is lower compared to Nifty EPS growth of 12 per cent.

“Valuations for Indian IT sector are still not attractive and there is scope for further downside due to weak earnings growth in the next 1-2 quarters, but we believe multiples could sustain given strong structural demand tailwinds around cloud migration and digitalisation. We assume pick-up in growth in H2FY24 and assign 5-year average multiple to companies in our coverage universe, which was the beginning of cloud and digitalisation cycle for Indian IT firms. In the existing scenario, we believe stock price returns may be driven by earnings growth rather than multiple expansion," ICICI Securities said.

ICICI Securities has maintained 'Buy' on Infosys Ltd, Persistent Systems Ltd and TCS; it has upgraded the HCL Technologies stock to 'ADD' from 'Hold' earlier. The brokerage maintain 'ADD' on Mphasis and downgraded LTIMindtree and Happiest Minds to 'ADD' from "Buy' earlier. Meanwhile, ICICI Securities maintained its 'Reduce' on Wipro and downgrade Tech Mahindra to 'Sell'. 

"Our downgrades are due to run-up in stock prices in the last two months with no change in our underlying thesis, our estimates and target prices. There is a risk of our and consensus Q1FY24 and FY24 estimates to be revised downwards. Our top picks are Infosys, Persistent and TCS and bottom pick is TechM," ICICI Securities said.

HDFC Securities said it sees low risk to guided mid-point of Infosys and HCL Tech, based on relative premium to global peers and the enterprise scorecard.

"Our base case is a flat sequential growth trajectory for the sector in Q1FY24E and progressing onto long-term averages over Q2 to Q4FY24E; downside risk is more near-term rather than medium-term. We continue our preference for LTIMindtree within large-cap IT, Persistent Systems within midcap IT, and Zensar moves up in the pecking order," it said.

Motilal Oswal Securities said the near-term uncertainty continues to pose challenges on growth visibility of key verticals (Financial Service and CMT) and geography (North America). It remains selective on tier-1 names and prefer TCS followed by HCL Technologies and Infosys.

"In the near term, we believe it's safer to play a sector with large-caps where valuations are closer to 10-year average multiples now. Among mid-caps we should be selective and prefer stocks with solid deal momentum like Coforge and Persistent Systems. We prefer to stay away from ER&D space such as LTTS and Cyient in the near term," it said.

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