TCS, Infosys, Wipro, HCL Technologies, Tech Mahindra, and other IT stocks may remain in strong upward momentum, continuing the stellar performance of the last 18 months
TCS, Infosys, Wipro, HCL Technologies, Tech Mahindra, and other IT stocks may remain in strong upward momentum, continuing the stellar performance of the last 18 months, said domestic brokerage and research firm Edelweiss Securities. The brokerage firm has been bullish on domestic IT stocks for the last couple of months now; however, it said it has “underestimated the tidal digital wave on both growth and margins”. “We now forecast industry revenue growth for the next three years will be 18-20% while margins, on average, will expand 100-200bps vis-a-vis FY21 led by pricing power and many of the costs not returning to pre-pandemic levels ever,” Edelweiss said.
Stocks to buy
The tech upcycle has just started for IT companies and there is still a long way to go, Edelweiss said. “We strongly believe the Tech Upcycle has progressed just a few quarters and that $500 billion hyperscaler revenues will percolate to services over the next three-five years, which would unleash substantial upsides — even hereon,” the report said. Edelweiss has a buy rating on Infosys, TCS, HCL, L&T Infotech, Coforge, Mindtree, Birlasoft, and First Firstsource Solutions. There is no reduce rating assigned to any IT stock under Edelweiss’ coverage.
Upgraded target prices
TCS: Buy – Target: Rs 5000 – Upside 29%
Infosys: Buy – Target: Rs 2,354 – Upside 40%
HCL Technologies: Buy – Target: Rs 1,710 – Upside 38%
Tech Mahindra: Buy – Target: Rs 1,751 – Upside 21%
Larsen & Toubro Infotech: Buy – Target: Rs 6,459 – Upside 16%
LT Technology Services: Buy – Target: Rs 5,004- Upside 15%
Mindtree: Buy – Target: Rs 4,575 – Upside 16%
Coforge: Buy – Target: Rs 7,357- Upside 39%
BirlaSoft: Buy – Target: Rs 568 – Upside 39%
Firstsource: Buy – Target: Rs 251 – Upside 24%
Edelweiss Securities has assigned 48x one-year forward multiple to Mindtree and 40x multiple to Coforge, LTI and LTTS believing that they are better proxies to hyperscalers and ER&D industry, “We prefer HCL, Infosys and TCS among large-caps, and Coforge, LTI and Mindtree in mid-caps. Among small-caps, we prefer Persistent, Birlasoft and Firstsource,” they added.
Higher demand for IT services
IT services continue to witness high demand, according to Edelweiss. This surge in demand is enabling IT sector players to pick large clients that drive growth. “Companies are also quite forthcoming on repricing new contracts, and even existing ones that are undergoing renewals, citing massive demand-supply mismatch. Clients are loosening purse strings for time-sensitive projects, tacitly paying 3–8% higher on average,” Edelweiss said.
The current technology cycle is seen to be more potent than all previous ones. “We remain confident that like all the past three IT upcycles, multiple re-ratings would be sharp in the early phase of this cycle too, which would be followed by further earnings upgrades as Street would play a catch-up,” the brokerage firm added. Serious data breaches, adverse currency movement, budgetary allocations, and adverse regulations are some of the risks that are aligned with IT stocks.
(The stock recommendations in this story are by the respective research and brokerage firms. Financial Express Online does not bear any responsibility for their investment advice. Please consult your investment advisor before investing.)