Shares of top Indian IT majors Tata Consultancy Services (TCS) and Infosys fell sharply amid volatility in the current market and IT stocks traded near their respective 52-week lows. TCS shares are down about 18% so far in 2022 while Infosys shares have fallen over 25% during the same period.
Domestic brokerage and research firm Motilal Oswal is bullish on IT stocks and both have buy tags TCS and with the target price of the share of Infosys 4,240 more 2,000 per respectively.
“TCS maintains its long-term aspirational margin band at 26-28% as it does not see any change in its long-term cost structure or relative competitiveness. High-quality revenue is supporting margin flexibility at TCS,” the note said.
Meanwhile, despite margin pressure in FY12, Infosys delivered a margin of 23% on the back of strong growth. According to the brokerage, with attrition moderation, improved pricing, less reliance on sub-contractors, higher fresher editions and strong operating leverage, both the companies should be able to maintain margins. With increasing demand, attracting talent, training and retention gaining paramount importance, both TCS and Infosys hired record numbers in FY22.
“Balance sheet for both IT companies remains strong and liquid (with cash at 21-34% of assets and ~4% of market capitalization). Sub-optimal assets like goodwill/intangible assets were lower for TCS and Infosys. In addition, TCS (~44%) and Infosys (~29%) had the best ROEs across the industry. Both the companies also reported strong payouts in FY12 (TCS/INFO – 97%/75%),” highlighted Motilal Oswal.
Given the strengths of TCS and Infosys, both the companies are well positioned to tide over the weak macro environment. It said margins should remain stable despite unfavorable conditions, easing job openings, strong new additions and a positive pricing environment.
The brokerage remains positive on the IT services sector on reasonable valuations and good double-digit earnings growth in FY23 (partly aided by 300-350 bp impact from depreciation in INR vs USD).
The views and recommendations given above are those of individual analysts or broking companies and not of Mint.