HCL Technology, Infosys and Tech Mahindra remain the JM Financial’s top IT stock picks amongst Tier I techs, while PSYS and MPHL are top picks amongst Tier II companies as these stocks may rally up to 25%.
Information Technology (IT) stocks have undergone healthy price correction recently and are available as a favourable risk-reward proposition for investors. However, the sector has slight currency pangs to contend with in near-term. “Indian IT Services sector enjoyed favourable on-year cross currency tailwinds until 2QFY22 with 3QFY22 marking the first quarter of YoY cross currency headwinds. If current exchange rates sustain, the YoY cross currency headwinds will increase further. This will pose some pressure on margins,” said JM Financial Services in its report. HCL Technology, Infosys and Tech Mahindra remain the brokerage’s top IT stock pick amongst Tier I techs, while PSYS and MPHL are picks amongst Tier II companies as these stocks may rally up to 25%.
Elongated supply side pressures pose risk to near term margin:
According to analysts at JM Financial, the Indian IT Services sector enjoyed favourable on-year cross currency tailwinds until second quarter of the current financial year with 3QFY22 marking the 1st quarter of on-year cross currency headwinds. “If current exchange rates sustain, the YoY cross currency headwinds will increase further in 4QF22. This will pose some pressure on margins as well per our rough calculations,” they said.
Companies likely to see further increase in on-year cross currency headwinds:
According to the domestic brokerage firm report, Indian Tier I techs like Infosys, TCS, HCL Technologies have enjoyed around 100-500 bps on-year cross currency tailwinds from 1QFY21-2QFY22 which has aided reported dollar revenue growth for the companies through the period. The third quarter of FY22 marked a change to that trend with the depreciation in Pound and Euro V/s USD. That has continued through the fourth quarter and “Indian techs are likely to see further hit on reported USD revenue growth.
While global peers and Indian techs sound confident of underlying demand strength, recent global macro turmoil needs watching due to possibility of some slowdown in client decision making as seen in the past cycles,” it said. Further with the recent upswing driven by smaller sized deals, this has the potential of hitting near-term demand strength, it added.
Currency headwinds on margins:
JM Financial believes that the recent currency moves may also pose slight headwinds on margins as well given that British Pound and Euro have depreciated V/s the INR. “While Indian techs have done well to defend margins through a majority of CY21, negating concerns in larger sections on the street of increasing supply side pressures, we reckon that resumption of travel and elongated supply side pressures are likely to lead to near term margin headwinds,” it said. Thereby it sees a potential pause to the ‘revenue growth led EPS upgrade cycle’ which has been in play for the sector as a whole over the past 18- 21 months.
Top IT Stock picks
Infosys: BUY
Target price: Rs 4,100
HCL Technologies: BUY
Target price: Rs 1,470
Tech Mahindra: BUY
Target price: Rs 1,900
Mphasis: BUY
Target price: Rs 3,550
Persistent Systems: BUY
Target price: Rs 4,800
(The stock recommendations in this story are by the respective research analysts and brokerage firms. TheSpuzz Online does not bear any responsibility for their investment advice. Capital markets investments are subject to rules and regulations. Please consult your investment advisor before investing.)