Ahead of September quarter earnings season, brokerage CLSA is bullish on major names in the information technology sector and advises investors to focus on quality stocks with a strong order book.
It said that normalisation of supply-side constraints and sharp currency moves through the quarter are likely to distort headline financials of information technology companies in the July-September period and advised investors to focus on the profile of order booking and deal pipeline to assess recovery strength during the second half of 2021-22.
CLSA said the recovery in revenue growth should help most companies manage the impact of depreciation in the rupee through the quarter. It added that TCS (Tata Consultancy Services) and Tech Mahindra could be outliers in this regard due to execution normalising.
The brokerage has estimated a 2.6-5.6 percent sequential growth in revenue in dollar terms for the top five players.
1. Tech Mahindra
The international brokerage has raised its target price on Tech Mahindra to Rs 940 from Rs 780, an upside of 14 percent from its closing price of Rs 821.85 as on 1 October.
"Our conversations with Tech Mahindra management lead us to take a more optimistic view on potential margin expansion; hence the 11.5% upgrade to our FY22/23 EPS forecasts. Valuations at 15 times FY22 EPS appear attractive on an absolute and relative basis," said CLSA.
Tech Mahindra's Q2 results will be out on 23 October.
2. HCL Technologies
CLSA has a "buy" rating on HCL Tech and raised the price target on the stock by 11.5 percent to Rs 970.
The company's Q2 earnings results is scheduled for 16 October. Brokerages have turned bullish on the stock after the company, in its mid-quarter update said that it expects "the Revenue and the Operating Margin for the current quarter (September'20) to be meaningfully better than the top end of the guidance we had provided in July'2020."
"Good Booking momentum continues this quarter, led by Life Sciences & Healthcare, Telecom & Media and Financial Services verticals," it added.
Shares of HCL Technologies closed at Rs 813.70, rising nearly 13 percent since the announcement on 14 September.
CLSA has upgraded its rating on Infosys to "buy" and raised the price target from Rs 1,150 to Rs 1,180. The stock is also among the brokerage's preferred picks ahead of the September season along with HCL Technologies.
Infosys will announce its financial results for the September-ended quarter on 14 October.
CLSA said that the risk-reward for TCS is attractive at the current levels. It has a "outperform" recommendation on the stock with a price target raised to Rs 2,610 from Rs 2,550.
Shares of the Tata group company closed at Rs 2,540 on 1 October.
TCS is set to open the earnings season, declaring its Q2 results on 7 October.
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