Jefferies Recommends ‘Buy’ on Infosys and Coforge Among Indian IT Stocks Amid Sector Uncertainty

According to analysts at Jefferies, after two consecutive quarters of revenue decline, some of India’s largest IT companies could see a slight uptick in revenue in September.

The analysts have projected a 0.5 percent growth in quarterly revenue for the companies they cover.

In their recent report on the Computer Services and IT Consulting sector, the analysts noted that valuations in the sector are high, prompting them to be selective in their stock recommendations. They have issued ‘buy’ ratings only for Infosys and Coforge. The analysts emphasized the NiftyIT index’s 7 percent outperformance compared to the Nifty index over the past two months. They also highlighted the importance of positive commentary from IT firms during this earnings season in influencing stock performance.

“While growth remains soft due to the challenging demand environment, we expect some stabilization and deal ramp-ups to drive a slight growth uptick. Among large-sized IT firms, we expect revenue growth to range between -1 percent and +1 percent QoQ. We expect Infosys (+1 percent QoQ) to lead on growth, while TechM (-1 percent QoQ) and Wipro (-1 percent QoQ) are likely to lag,” the analysts stated in their report.

Regarding mid-sized firms, they anticipate Coforge to lead with 2.5 percent QoQ growth, while growth at L&T Infotech (LTIM) is expected to be softer at 1 percent QoQ. They also expect that the total contract value (TCV) of deals will be strong for TCS, Infosys, and HCL Technologies due to multiple large deal announcements but soft for other firms.

Given the ongoing demand uncertainty, the analysts advise remaining selective. They believe that consensus estimates of over 8 percent US dollar revenue growth in FY25 (a 80 basis points increase from their estimates) are at risk. They consider the sector’s valuation at 24x PE to be rich, representing a 20 percent premium to the 10-year average and a 28 percent premium to the Nifty.

For the second quarter, they expect margins to remain flat for the companies they cover, with limited scope for margin expansion due to tepid growth. They anticipate margin expansion of 20-40 basis points for TCS, Infosys, and HCL Technologies, driven by higher utilization and operational efficiencies. However, they forecast a significant margin contraction of 170 basis points for L&T Infotech due to wage hikes and 80 basis points for Tech Mahindra due to provisions on receivables and revenue decline. Wipro’s margins are expected to contract by 30 basis points due to revenue decline.

In the upcoming earnings season, the analysts will focus on commentary regarding the demand environment and any indications of improvement or expectations of a second-half recovery in the fiscal year. They also express interest in any commentary related to generative AI.

“For TCS, we expect a buyback and a focus on strategic direction under new leadership. For Infosys, the focus will be on leadership changes and its margin program. For Tech Mahindra, the focus will be on strategy under the new CEO and margin recovery. For Coforge, the focus will be on execution following the Barings stake sale,” they added.

They do not anticipate any changes to FY24 guidance for any firm, except for HCL Technologies, which could provide hints about achieving the lower end of its margin guidance.

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