2 Large Cap IT Stocks ICICI Direct Suggests, To Buy Ahead Of Q1Fy23 Results

Key watch out for the sector

Though demand seems fine and there is good pick up from sectors including BFSI space, what needs to be watched out is how global macros as well as geo-political risks pans.

ICICI Direct's outlook on IT companies

"We expect Infosys and HCL Tech to maintain their annual revenue and margin guidance. Due to unfavourable currency movements, there would be cross currency headwinds, which are expected to impact dollar revenues for the quarter. Rupee revenues for the quarter are expected to be aided by rupee depreciation against dollar. Accenture's outsourcing business (proxy to Indian IT) reported strong numbers on revenues in Q3 but new deal bookings have witnessed some deceleration in the last two to three quarters (albeit on a high base). We believe new bookings number needs to pick up in subsequent quarters for better revenue visibility for Accenture.

Continuous investments in newer technologies like cloud transformation (Accenture continues to maintain
that ~30-40% of applications has been migrated to cloud, suggests long tail of cloud transformation ahead), AI/ML, block chain [as per CB insights,
US$25 billion (bn) have been already invested by blockchain companies in CY21], which is expected to further propel demand in coming quarters. We expect TCS, Infosys, Wipro to post constant currency (CC) revenue growth in range of 2.5-4.5% QoQ while HCL Tech is expected to post weak growth of 2.0% QoQ due to continued weakness in P&P business and also muted IT services business. TechM is also expected to post 2% QoQ revenue growth due to seasonal weakness in its Comviva business.

LTI is expected to post 3% QoQ CC growth factoring in absence of pass through revenues (2- 2.5% impact) for the quarter. Mindtree is expected to report
5% CC growth to be aided by broad based growth across verticals of travel, BFSI, insurance except retail sector. There would be cross currency headwinds in range of 50-140 bps for companies mentioned above, which would impact dollar revenue growth negatively. TCS, Infosys & Wipro are expected to see dollar revenue growth of 1.5-3.5% QoQ, respectively. HCL Technologies (HCLT) is expected to witness dollar revenue growth of 1.4% QoQ. LTI, Mindtree, Tech M are expected to see dollar revenue growth in the range of 2%, 4.5%, 0.7%, respectively, QoQ. Coforge is expected to witness revenue growth of 3% QoQ.

Top preferred picks

"We prefer Infosys, Mindtree" says the brokerage in its report. Margins are seen to take a hit and the brokerage estimates it to see a decline in EBIT margins sequentially in the range of of 55-240 bps.

Disclaimer

The stocks preferred are given from the brokerage report of ICICI Direct. Markets are highly volatile, do take such risky bets after judicial self-diligence or better taking experts' viewpoint on the same.