IT stocks: HCL Tech top pick, use corrections to buy TCS, LTIMindtree shares, says PL

IT stocks: HCL Tech top pick, use corrections to buy TCS, LTIMindtree shares, says PL

PL said HCL Technologies is its top IT pick and that any correction in Tata Consultancy Services Ltd and LTIMindtree Ltd would make their valuations attractive again.

Amit Mudgill
Amit Mudgill
  • Updated Aug 1, 2024 2:34 PM IST
IT stocks: HCL Tech top pick, use corrections to buy TCS, LTIMindtree shares, says PLPL finds HCL Tech Rs 1,790-worthy. It has a target of Rs 1,680 for Infosys, Rs 6,040 for LTIMindtree, 4,370 for TCS, Rs 1,340 on Tech Mahindra and Rs 530 on Wipro. 

Tier-1 IT firms witnessed a sharp turnaround in the June quarter after five straight quarters of underperformance vis-a-vis Tier-2 players, Prabhudas Lilladher (PL) said in its results review note. The broad-based recovery across key verticals and geographies signals sustained execution for the rest of the year, it said while noting that a strong optimism has already built into valuations, leaving limited upside potential for IT stocks. 

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PL said the growth outlook (for the rest of FY25) for Tier-2 companies resonated well across management commentaries, despite a few names having underperformed in the June quarter.  "The growth optimism for Tier-2 is also reflected in the valuation premium gap that has improved (14 per cent) against Tier-1 (at parity last quarter). However, earnings growth for Tier-2 is expected to be under pressure in FY25, as indicated by weak Q1 margin, with wage revision still pending. We remain selective on a few Tier-1 names that have a diversified business mix and are trading at inexpensive valuation," the brokerage said.

PL said HCL Technologies Ltd (HCL Tech) is its top IT pick and that any correction in Tata Consultancy Services Ltd (TCS) and LTIMindtree (LTIM) would make their valuations attractive. PL has 'Hold' ratings on Infosys and Wipro, 'Accumulate' ratings on TCS and LTIMindtree and a 'Reduce' rating on Tech Mahindra (TechM).  

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PL finds HCL Tech Rs 1,790 worthy. It has a target of Rs 1,680 on Infosys, Rs 6,040 for LTIMindtree, Rs 4,370 on TCS, Rs 1,340 on Tech Mahindra and Rs 530 on Wipro. 

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PL said Infosys outperformed its peers and reported 3.6 per cent QoQ constant currency (CC) revenue growth in Q1, followed by LTIMindtree , with 2.6 per cent QoQ CC growth. Conversely, HCL Tech was the outlier and reported a decline of 1.6 per cent CC QoQ, followed by Wipro, which saw a decline of 1 per cent QoQ CC. 

On the margins front, Tech Mahindra outperformed its peers with 115 bps QoQ improvement, followed by Infosys and LTIMindtree with 100 bps and 30 bps QoQ improvement, respectively. 

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"In contrast, TCS and HCLT reported a sharp decline of 130 bps and 50 bps QoQ, attributed to compensation revision and project runoffs, respectively," it said.

Within Tier-2 players, Persistent Systems and Zensar Technologies remained the front-runners in with 5.6 per cent and 4.3 per cent QoQ CC revenue growth, respectively. Cyient's sales declined 5 per cent  QoQ CC. 

On the margins front, Persistent systems was an outperformer with 85 bps QoQ improvement, while Cyient and L&T Technology Services saw a sharp decline of 260 bps QoQ and 130 bps in margins QoQ due to project ramp-down and seasonality.

Despite delivering better performance than anticipated, Tier-1 companies (barring Infosys) largely maintained their guidance or directional outlook for the year. Meanwhile, Tier-2 companies (excluding Cyient and Birlasoft) remained confident of delivering industry leading growth on the back of a robust deal pipeline or continued strengthening of certain verticals. 

"With the majority of Tier-1s having outpaced the Q1 growth consensus, the ask-rate for the coming quarters has minimized to achieve FY25 revenue guidance (INFY and HCLT). Given the growth uptick in Q1 along with some green shoots of demand recovery beyond critical line of business (if not discretionary), we expect the constructive recovery to continue in the coming quarter," it said.

Disclaimer: Business Today provides stock market news for informational purposes only and should not be construed as investment advice. Readers are encouraged to consult with a qualified financial advisor before making any investment decisions.
Published on: Aug 1, 2024 2:34 PM IST
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