Tech Mahindra To TCS: IT Stocks Rise As Brokerages Positive On Steady Guidance
India IT stocks have outperformed the index over the past month, unlike the US or Europe, Morgan Stanley said.
Shares of information technology companies were trading higher on Monday as brokerages were "cautiously optimistic", as they did not anticipate any reduction in the already weak guidance amid expectations of stable discretionary demand.
All of the Nifty IT constituents rose, and the index hit its highest level in over three months. It has gained 4% from its closing price on Wednesday. The sector contributed the most, or 43.47 points, to the 77.8-point rise in the benchmark Nifty as of 10:57 a.m.
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India IT stocks have outperformed the index over the past month, unlike the US or Europe, where IT services stock have struggled to outperform, according to a Morgan Stanley report. However, most stocks are still underperforming on a year-to-date basis, it said.
Year-to-date, the Nifty IT has risen 4%, compared to an 11% advance in the Nifty 50.
Moreover, the relative valuation to the market is now only slightly higher than the long-term average, the brokerage said. "With this backdrop, we maintain our in-line view of the sector with the possibility of revenue upgrades when the recovery comes," it said.
Morgan Stanley said management commentary points to improving growth trends in the second quarter as compared to the first one.
Infosys Ltd. and Tata Consultancy Services Ltd. are the brokerage's top picks. The brokerage maintains a neutral view on LTIMindtree Ltd., despite the stock's improving growth and recent surge. "Wipro stock has run up, making its risk reward relatively less favourable."
CLSA has upgraded its rating for Wipro Ltd. to 'outperform' from 'underperform'. With the initial signs of execution success at Wipro, such as large deal wins and the possibility of a buyback announcement, the brokerage has turned incrementally more positive on the stock.
HCL Technologies Ltd. needs to show strong execution to meet its guidance, according to Morgan Stanley. "Within mid-caps, we believe Coforge looks relatively better than peers such as Mphasis Ltd., L&T Technology Services Ltd., Tata Elxsi Ltd., and Cyient Ltd.," it said.
CLSA downgraded Infosys to 'hold', following its rally and prefers Tech Mahindra Ltd., HCLTech and Wipro, which it has rated 'outperform'.
It maintained an 'underperform' rating on LTIMindtree and a 'hold' on TCS.
Shares of Tech Mahindra hit their highest level in over two years on Monday, while those of Tata Consultancy Services hit highest in over two months. LTIMindtree stock hit its highest level since Feb. 26.
Wipro shares also hit its highest level since Feb. 27 and Persistent Systems Ltd. shares hit their highest since Feb. 19.
"We remain cautiously optimistic on the Indian IT sector as the Gen Al scale-up is not proving to be a major headwind for IT jobs," said CLSA. No cut in Accenture's August year-end 2024 guidance implies discretionary demand optimisation has stabilised, even if there is no revival in the near-to-medium term, it said.
Kotak Institutional Equities forecasts moderate growth for the companies, on account of seasonal strength, large deal ramp-up, and reduced intensity of cuts in discretionary. It expects Infosys, TCS, LTIMindtree, Persistent and KPIT Technologies Ltd. to report robust sequential growth rates, but sees HCLTech, Cyient and Mphasis Ltd. reporting muted number. The brokerage's top picks are Infosys, TCS, and Coforge.
