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TCS vs Infosys vs HCL Tech: Stock that analysts are betting on ahead of Q2 results

TCS vs Infosys vs HCL Tech: Stock that analysts are betting on ahead of Q2 results

Infosys, the second largest domestic IT firm by revenues, is seen leading the Q2 revenue growth. TCS, the largest IT firm in terms of sales, may report the highest margin expansion among the three IT firms, analysts said.

Among the three stocks, Infosys is Emkay Global's top pick, followed by HCL Technologies and TCS.  Among the three stocks, Infosys is Emkay Global's top pick, followed by HCL Technologies and TCS. 

IT majors TCS, Infosys and HCL Technologies are likely to report their September quarter earnings in the next two weeks and, if we go by analyst projections, the IT firms should report a decent set of numbers, notwithstanding macro uncertainties.  

Infosys, the second largest domestic IT firm by revenues, could lead the revenue growth and may announce buyback along with its September quarter results. TCS, the largest IT firm in terms of sales, is seen reporting the highest margin expansion among the three IT firms.   

The sector growth in September quarter is likely to be driven by robust deal-wins in previous quarters, strong headcount addition and improvement in pricing mix, said analysts.  Management commentaries would hold the key, they said, as they felt the market may still be underestimating margin and demand risks.

Here's what analysts said ahead of the September quarter earnings season:

Revenue growth, margin forecast
Edelweiss expects TCS, Infosys, Wipro would report a sequential revenue growth of 0.8 per cent, 2.9 per cent and 2.2 per cent, respectively, in dollar terms. It sees EBIT margin would improve by 60 basis points QoQ for TCS, 40 bps for Infosys and 30 bps for HCL Technologies.

In terms of bottom line, Nirmal Bang Institutional Equities sees Infosys logging 11.8 per cent YoY (up 13.1 per cent QoQ) rise in net profit at Rs 6,063.40 crore. TCS is seen reporting 5.8 per cent YoY (up 7.4 per cent QoQ) rise in net profit at Rs 10,182 crore. HCL Tech is seen clocking 9.6 per cent growth (up 9 per cent QoQ) in year-on-year profit at Rs 3,578 crore

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Things to watch out for
For Infosys, said Edelweiss, investors may watch out for total contract value (TCV) for the quarter, the deal momentum and also the commentary by segments, particularly on retail, financial services and communication and supply-side pressure. Infosys is expected to maintain its revenue and growth guidance for FY23.

For TCS, eyes would be on large deal wins, attrition pressure, client budgets and how the pipeline is shaping amid geopolitical uncertainties. One would also want to hear on the IT firm's hiring plans.

For HCL Tech, deal momentum, tenure and pricing; cloud-led adoption; attrition and hiring trends; deal conversion timelines; and client spending trend amidst an uncertain macro outlook will be keenly followed. HCL Tech is seen maintaining its revenue and margin guidance.

Stock performance
As Nirmal Bang Institutional Equities noted, September was third successive quarter of underperformance for Nifty IT index vis-a-vis Nifty.  The IT index fell 3.1 per cent in September quarter, which was a strong 11.40-percentage point underperformance over Nifty. TCS was down 8 per cent for the quarter. Infosys declined 3.3 per cent for the quarter while HCL Tech fell 4.2 per cent during the same period. 

Which stock to consider?
Jefferies has a 'buy' rating on Infosys and a price target of Rs 1,700, which suggests a healthy upside from here on. On the other hand, it has 'hold' ratings on TCS and HCL Tech. Its price targets on the two stocks suggest single digit upsides ahead.  

Among the three stocks, Infosys is Emkay Global's top pick, followed by HCL Technologies and TCS. 

Motilal Oswal likes all the three stocks.

"We continue to prefer Tier I players over their Tier II counterparts, given their relative valuation attractiveness and diversified client portfolio. Among Tier I players, we prefer TCS, HCL Tech, and Infosys. We expect Infosys to deliver a top quartile growth, backed by strong deal wins and price revisions. HCL Tech is one of the key beneficiaries of Cloud adoption at scale, given its expertise in IMS," it said.

TCS, Motilal Oswal said, remains best positioned to benefit from the long-term structural tailwinds in Tech Services and should see a relative pickup in growth, aided by the base effect and increased aggression. This brokerage has a target of Rs 1,170 on HCL Tech (25 per cent upside potential), Rs 3,530 on TCS (17 per cent potential upside) and Rs 1,640 on Infosys (16 per cent upside potential).

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Published on: Oct 03, 2022, 12:18 PM IST
Posted by: Amit Mudgill, Oct 03, 2022, 11:43 AM IST