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JM Financial expects IT stocks to remain resiliant; Infosys, HCL Tech, TechM top picks

As the COVID-19 pandemic has driven an increased focus on digital transformation, tech spending is expected to hold up better as customers invest to ensure business continuity and seamless operations.

October 01, 2020 / 12:16 PM IST
 
 
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In the wake of the COVID-19 pandemic, most IT stocks have stood tall, with Infosys, TCS and HCL Technologies hitting their new 52-week highs recently.

These stocks look poised for further gains due to the prospects of improvement in revenue growth.

As the COVID-19 pandemic has driven an increased focus on digital transformation, tech spending is expected to hold up better as customers invest to ensure business continuity and seamless operations.

Brokerage firm JM Financial expects this trend to help drive improvement in the sector’s revenue growth prospects through the next few years.

"For the foreseeable future, we see upsides to growth; tech’s intensity of businesses has been rising through the years and may only accelerate as companies transition to a post-COVID world. We would not be surprised if Indian techs report significantly better-than-expected performance in the September quarter when they release results next month. This should provide more confidence in the ‘growth improvement’ thesis for the sector as a whole," said JM Financial.

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However, the brokerage firm is of the view that FY21 revenue growth may still be impacted by a weak start to the year on a sharp decline in revenues in the Jun’20 quarter.

JM Financial believes apart from increased offshore delivery, some general and administrative (G&A) savings in the form of lower travel and facility costs, along with the possibility of reducing sub-contracting expenses (as the ‘work-from-anywhere’ proposition gains more currency) would support improvement in margins for the sector over the foreseeable future.

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Infosys | Buy | Target price: Rs 1,200

Infosys is JM Financial's top pick among India’s Tier-I techs.

"We assume coverage with a buy rating and a target price of Rs 1,200 based on 23 times December 2022E EPS. We believe that Infosys remains best-placed to lead on revenue growth, aided by renewed focus in recent years that is driving significant improvement in win rates," JM Financial said.

As per the brokerage, Infosys remains confident on demand citing a solid deal pipeline and recent win rates, notwithstanding macro uncertainty.

The brokerage believes that Infosys has a real chance to capture the lost ground over the past decade with the consistency under the new leadership and once again command the hitherto premium valuations in the sector.

HCL Tech | Buy | Target price: Rs 900

"We assume coverage on HCL Tech with a buy rating and a target price of Rs 900, based on 17 times December 2022E EPS (a 25 percent discount to our target multiple for Infosys and TCS)," said the brokerage.

While the street has had concerns around the diversification of the product for HCL in recent years, the services business has been a consistent performer (evident in HCLT’s leading revenue growth in FY20 on an organic basis), the brokerage added.

Deal win momentum, along with the recent mid-quarter update, provides further confidence in HCL’s financial performance sustaining, going forward, JM Financial said.

Tech Mahindra | Buy | Target price: Rs 850

JM Financial has coverage on Tech Mahindra with a buy rating and target price of Rs 850, based on 14 times December 2022E EPS.

"While Tech Mahindra’s financial performance has been rather patchy relative to its Tier-I peers, our positive stance on Tech Mahindra is underpinned on the likely improvement in margins through FY20-23E aided by growth leverage and other cost levers such as subcontracting expenses, increase in the offshore mix of revenues as well as the restructuring of underperforming subsidiaries," said JM Financial.

The brokerage estimates a 260 bps improvement in EBIT margins through FY20-23E which supports 11 percent EPS CAGR through the period.

Tata Consultancy Services (TCS) | Hold | Target price: Rs 2,400

JM Financial has a hold rating on the stock with a target price of Rs 2,400 based on 23 times December 2022E 1-year forward EPS (10 percent premium to TCS’ mean 1-year forward P/E).

TCS’ premier positioning and full services portfolio position it well to capture a fair share of the business as tech spending picks up; however, its portfolio mix and some client-specific challenges could continue to result in relative growth under-performance, said the brokerage.

"While EBIT margins could recover in the near term from near-Mar’09 levels, we note that TCS’ EBIT margins are expected to remain below the aspirational range of 26-28 percent for the fifth year in a row. Valuations at nearly 24 times/22 times FY22/23E appear full, limiting stock upsides and underpinning our hold rating," JM Financial said.

Wipro | Hold | Target price: Rs 290

JM Financial has a hold rating and a target price of Rs 290 based on 14 times December 2022E 1-year forward EPS, in line with the mean 1-year forward P/E.

"After the recent CEO change, hopes are running high in anticipation of a revival in Wipro’s revenue growth trajectory. However, we need to see some concrete progress as Wipro has continued to cede space to competition," JM Financial said.

In the views of the brokerage, Wipro’s underperformance is a result of several years of lack of client relevance; similar hopes had been ignited with CEO level changes in 2011 and 2016.

"Wipro’s EBIT margins may benefit from industry tailwinds and could surprise positively. Valuations remain inexpensive relative to peers but need to be seen in the context of continued growth underperformance," said JM Financial.

Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
Moneycontrol News
first published: Oct 1, 2020 12:16 pm

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