TCS, Infosys, Wipro, HCL Technologies: Which IT stock to buy ahead of Q2 result season?

Information technology (IT) firms may report marginal improvement in year-on-year (YoY) growth trajectory in Q2FY24 based on a stable demand environment, benefits of large deal ramp-ups and no further deterioration in discretionary spending. IT major Tata Consultancy Services is slated to report its financial results on October 10. It is followed by HCL Technologies (October 14), Mphasis (October 16), Infosys (October 17), Wipro (October 17) and Tech Mahindra (October 19).

With returns of 3.44%, the NSE Nifty index outperformed the benchmark equity index BSE Sensex (up 2.68%) during July-September quarter amid hopes of recovery in demand. Brokerage Emkay Global believes the uptick in technology spending in CY25 hinges on confidence on macro stability and resilience of the economy after start of the interest rate-cut cycle; some clarity on it is expected earliest in early CY25.

“Q2FY25 revenue growth is likely to reflect the steady demand environment and usual seasonal strength although discretionary spending is yet to recover,” Emkay Global Financial Services said in a report. On the other hand, PL Capital expects IT companies to report a median revenue growth of 1.6% QoQ CC in Q2 against 1.5% in Q1.

“Major currencies EUR and GBP have strengthened meaningfully against dollar by 2% and 2.9% in Q2, respectively, which will act as a tailwind. Likewise, operating margins are expected to witness a notable recovery of 40bps (median),” PL Capital said in a report.

Emkay Global sees 7.7% YoY and 4.3% revenue growth for TCS and Infosys, respectively, in Q2FY25. On the other hand, it believes that TCS may post 9.9% YoY growth in net profit for the quarter ended September 2024, while Infosys may post a 7.1% rise in net profit. It also expects a 14.4% YoY rise in net profit of Wipro despite a 0.8% YoY expected fall in revenue. Emkay Global has a ‘Reduce’ rating on TCS with a target price of Rs 4,500 and a ‘Buy’ rating on Infosys with a target price of Rs 2,150.

PL Capital has a ‘Buy’ call on TCS, Infosys and HCL Technologies with a target price of Rs 4,950, Rs 2,180 and 2,080 respectively. It also has an ‘Accumulate’ call on Wipro with a target price of Rs 580.

PL Capital sees 7.7%, 4.9% and 7.3% YoY growth in revenue for TCS, Infosys and HCL Technologies, respectively, in Q2FY25. On the other hand, it expects 13.2%, 9.8% and  6.2% YoY rise in profit after tax for TCS, Infosys and HCL Technologies, respectively. Emkay Global also sees 7.1% and 7.7% rise in revenue and net profit, respectively, for HCL Technologies.

Going into the result season, market participants should zero in on FY25 revenue or margin guidance changes, management commentary on demand trends across geographies, confidence on H2 growth uptick, furlough requests by clients, recovery in discretionary spending and signs of optimism in client conversation after recent interest rate-cut in the US. The pace of decision-making, demand trends in key verticals of BFSI, retail, manufacturing, communications and Hi-Tech, deal intake and pipeline, attrition and hiring trends, progress on Gen AI and pricing environment are among other key monitorables.

“Improving macro indicators in the developed regions and much anticipated US rate cut should accelerate the pace of business activities, and enable enterprise clients to resume discretionary programs and start awarding notable contracts in the coming quarters,” PL Capital said adding it is upgrading ratings on Infosys, TCS and LTIM to ‘Buy’, as they are well positioned to capture the incremental spends on transformation-led initiatives with their full-stack offerings, disciplined execution, and scalable resources. With that, our Tier-1 pecking order remains HCL Technologies, Infosys, LTIM and TCS.