TCS, Infosys, HCL Tech, Wipro, TechM: Are IT shares overvalued? Stock picks by analysts ahead of Q3 results
The BSE IT index has dropped 3 per cent in the last five days against a 1 per cent drop for the Sensex, with Infosys Ltd (down 4 per cent), Wipro Ltd (down 3.49 per cent), TCS (3.17 per cent), Tech Mahindra Ltd (down 2 per cent), HCL Technologies Ltd (down 2 per cent).
- Jan 3, 2024,
- Updated Jan 3, 2024 10:35 AM IST
The BSE IT index, which climbed 18 per cent in the last six months against a 10 per cent rise for the BSE Sensex, has seen some weakness of late amid concerns over valuations, as analysts do not expect any drastic shift in the management commentary on the demand outlook post December quarter results.
The BSE IT index has dropped 3 per cent in the last five days against a 1 per cent drop for the Sensex, with Infosys Ltd (down 4 per cent), Wipro Ltd (down 3.49 per cent), Tata Consultancy Services (down 3.17 per cent), Tech Mahindra Ltd (down 2 per cent), HCL Technologies Ltd (down 2 per cent) falling up to 4 per cent during the same period.
JM Financial expects the sector to give modest returns, at best, in 2024. A likely weaker FY24 exit and potentially lower-than-expected initial FY25 guidance could offer investors better entry point post Q4 results. The brokerage said Nifty IT’s earning yields has converged with US 10-year yields, making re-rating less likely.
"That said, we realise that multiples may not correct much. We therefore raise target PER across coverage to align with current valuations. A modest return in 2024 is our base case," it said.
Nomura India said it remains cautious on the sector given limited visibility on a significant turnaround in discretionary demand for IT services. The foreign brokerage expects operating performance to vary significantly across companies in FY24-25 and said it remains selective in its picks.
"We downgrade Wipro to Reduce (from Neutral). Our top picks are Cognizant (not listed in India) and TechM in largecaps, and Coforge and Birlasoft in mid-caps (all Buys). We maintain our Reduce rating on TCS, LTIMindtree, Mphasis and L&T Technology Services (LTTS)," the brokerage said.
Nuvama Institutional Equities is positive on LTIMindtree Ltd, Coforge Ltd, Persistent Systems Ltd, TCS and HCL Tech.
"The multiple rerating accounts for most of the FY24TD gain, even though earnings estimates have declined over the same period (except for Birlasoft, Firstsource, eClerx). We raise target multiples to factor-in the anticipated acceleration in the revenue growth trajectory and the lower macro uncertainty. We upgrade HCL Tech to BUY from Reduce, while retaining our rating on other coverage stocks. Our pecking order is Infosys, HCL Tech, Tech Mahindra, Wipro, TCS, and LTIMindtree, among Tier-1 companies," said Emkay Global.
Motilal Oswal prefers Tier 1 stocks over Tier 2 stocks. The 1-year forward P/E for the IT stocks stood at 26, wherein Tier-2 looks expensive at 35 times that translates into 50 per cent premium to the Tier-1 pack.
"Among Tier-I players, HCL Tech is one of the key beneficiaries of having a defensive business mix that should support growth in a demand-constraint environment. Additionally, we expect INFO to be a key beneficiary of the acceleration in digital and business transformations in the medium term," it said.
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Also read: Stock recommendations by brokerages for January 3, 2023: Zomato, BHEL, Bank of Baroda and SBI
The BSE IT index, which climbed 18 per cent in the last six months against a 10 per cent rise for the BSE Sensex, has seen some weakness of late amid concerns over valuations, as analysts do not expect any drastic shift in the management commentary on the demand outlook post December quarter results.
The BSE IT index has dropped 3 per cent in the last five days against a 1 per cent drop for the Sensex, with Infosys Ltd (down 4 per cent), Wipro Ltd (down 3.49 per cent), Tata Consultancy Services (down 3.17 per cent), Tech Mahindra Ltd (down 2 per cent), HCL Technologies Ltd (down 2 per cent) falling up to 4 per cent during the same period.
JM Financial expects the sector to give modest returns, at best, in 2024. A likely weaker FY24 exit and potentially lower-than-expected initial FY25 guidance could offer investors better entry point post Q4 results. The brokerage said Nifty IT’s earning yields has converged with US 10-year yields, making re-rating less likely.
"That said, we realise that multiples may not correct much. We therefore raise target PER across coverage to align with current valuations. A modest return in 2024 is our base case," it said.
Nomura India said it remains cautious on the sector given limited visibility on a significant turnaround in discretionary demand for IT services. The foreign brokerage expects operating performance to vary significantly across companies in FY24-25 and said it remains selective in its picks.
"We downgrade Wipro to Reduce (from Neutral). Our top picks are Cognizant (not listed in India) and TechM in largecaps, and Coforge and Birlasoft in mid-caps (all Buys). We maintain our Reduce rating on TCS, LTIMindtree, Mphasis and L&T Technology Services (LTTS)," the brokerage said.
Nuvama Institutional Equities is positive on LTIMindtree Ltd, Coforge Ltd, Persistent Systems Ltd, TCS and HCL Tech.
"The multiple rerating accounts for most of the FY24TD gain, even though earnings estimates have declined over the same period (except for Birlasoft, Firstsource, eClerx). We raise target multiples to factor-in the anticipated acceleration in the revenue growth trajectory and the lower macro uncertainty. We upgrade HCL Tech to BUY from Reduce, while retaining our rating on other coverage stocks. Our pecking order is Infosys, HCL Tech, Tech Mahindra, Wipro, TCS, and LTIMindtree, among Tier-1 companies," said Emkay Global.
Motilal Oswal prefers Tier 1 stocks over Tier 2 stocks. The 1-year forward P/E for the IT stocks stood at 26, wherein Tier-2 looks expensive at 35 times that translates into 50 per cent premium to the Tier-1 pack.
"Among Tier-I players, HCL Tech is one of the key beneficiaries of having a defensive business mix that should support growth in a demand-constraint environment. Additionally, we expect INFO to be a key beneficiary of the acceleration in digital and business transformations in the medium term," it said.
Also read: YES Bank shares Q3 business updates; stock rebounds to trade higher
Also read: Stock recommendations by brokerages for January 3, 2023: Zomato, BHEL, Bank of Baroda and SBI