Top 8 IT stocks to buy ahead of Q2 results, as recommended by HDFC Securities

Research analysts at brokerage firm HDFC Securities said in a note that “The IT sector is expected to post resilient Q2 performance in the context of the current macro environment. Tier-1 IT is expected to deliver a sequential growth of 2.4% to 4% CC The severity of the cross currency impact will be similar to the previous quarter with a sequential impact of -1.3% to -1.8% for Tier 1. Although a larger band (0.9% to 5.3% QoQ), the growth outperformance of mid-tier IT (vs. Tier-1) is expected to continue in Q2. Within the midtier, Tata Alexi, Mindtree, and Persistent are expected to lead on the top of single-digit sequential growth. Supply-side normalization (monthly in job postings and job indices) decline) can be considered positive from an operating/margin perspective.Despite macro challenges in Europe, contracting activity remains strong (TCS-M&S, Boots, Nokia, Zurich Insurance; Infosys-Telenor, LTTS-BMW, ​​Persistent -Monument Bank) Accenture’s outsourcing bookings at all-time high (also affected by higher transaction duration) And the top end of the revenue guide also reflects demand flexibility.”

“With approximately 10% decline in GBP, EUR from last quarter, enhanced by Yen and AUD, currency volatility will adversely impact Q2 performance as well as Q3FY23E. For Tier-1 IT, we are building CC growth moderation to 13% for FY23E (~400bps negative cross currency effect) and 10% for FY24E (~1% negative cross currency effect), while FY22 compared to the 18% increase recorded in . Infosys is likely to maintain its 14-16% CC guidance for FY23E and HCL Tech is expected to maintain its 12-14% growth guidance for FY23E. Wipro’s Q3 growth guidance is likely to be 1-3% CC QoQ and LTTS is expected to maintain its 14.5-16.5% CC growth for FY23E,” he further added.

“We believe margins have come down in Q1 after correcting to >400bps since post-Covid peak levels (Q3FY21) and are tracking lower by ~100bps versus pre-Covid. We are making margin 100bps lower than pre-covid for FY23E and some recovery (on pre-covid) in FY24E supported by medium term tailwind of attrition/sub-con, normalization in usage and pricing. Wage impact and cross currency will impact margins in Q2 which will be offset by visa cost, INR depreciation, better utilization and lack of capacity. We believe there is less risk to margins even in the face of sharp demand reduction,” he said in a research report.

“The IT index P/E multiplier is down 35% YTD, with an earnings cut of ~6%. While the P/E D-rating was led by macro risk on growth (FY 24E), the earnings cut was driven by margin cuts as there was a lead-lag between growth and normalization of operating structure. The margin of safety is higher for Tier-1, with valuations closer to the 10Y average (as compared to a >40% premium at the end of CY21). Mid-tier IT resilience Sustainable growth premium (>500bps growth premium of mid-tier IT versus Tier-1 over FY 2012-25E) and almost unchanged consensus earnings estimates (for 2% reduction versus 7% for average cut) is reflected in. 1) in the last 3M. We roll over the target valuation to June-24E EPS and reset the USD-INR estimates. Maintain your constructive stance on this area and short-term volatility provides strong opportunities for absolute returns,” claimed the research analysts.

The views and recommendations given above are those of individual analysts or broking companies and not of Mint.