3 IT Stocks To Buy For A Potential Upside of 16% Suggests IIFL Securities

Tech Mahindra Ltd

According to the brokerage, from its current market price of Rs. 1570-1620 the stock may hit a target price of Rs. 1850 in 1 year which results in a decent gain of 16%. The brokerage in its research report has said that "TechM has delivered broad-based growth in 1HFY22 and sees the momentum in its focus verticals continuing. 5G has started contributing meaningfully to its top line, with annualised revenue run rate of US$500mn in 2QFY22. Given the strong order book, pick up in hiring and focus on client mining, we forecast TECHM's USD revenues to clock 14% CAGR over FY21-24ii. TechM has won over US$3bn of net new deals in the last 12 months, driven by its strategic focus on proactive deals, collaborative deals and dedicated squads. Management expects the deal momentum to continue going forward. Its success in large-deal wins over the last three quarters is visible in the quarterly average deal wins increasing by 3x in 1HFY22 vs. FY18."

According to the brokerage's call "TechM has restructured its large-deal team which has led to a 3x increase in the average quarterly deal-win TCV since FY18. TECHM is improving operational metrics like utilisation, offshoring and employee pyramid rationalisation, along with improving portfolio companies' margins, have led to 360bps EBIT margin improvement from FY20 to 2QFY22. Management is confident of exceeding its FY22 guidance of double-digit organic revenue growth and sees room for further margin improvement. Thus, we recommend a buy with a target of Rs. 1,850 for a 12-month period."

Persistent System Ltd.

According to the brokerage, the stock may achieve a target price of Rs. 5,058 in a year, representing a 16 percent rise from its current market price of Rs. 4,320-4400. IIFL Securities in its research report has said that "Persistent Systems (PSYS) overall revenues were aided by continued strength in the Services segment (+10.1% QoQ), while the IP-led revenues rebounded (+4.2% QoQ). Among verticals, BFSI (+8.9%) and Healthcare (+13%) showed strong growth, helped by deal ramp-ups. Within geographies, Europe was soft due to the holiday season. We now forecast PSYS to deliver 29% Cagr in FY21-23ii (industry-leading), on strong deal ramp-ups. The company's 2Q margins at 13.9% (-20bps QoQ) were above IIFL estimates (13.4%) despite full impact of wage hikes (~230bps) during the quarter. We forecast EBIT margins to expand by 290bps over FY21-24ii, driven by levers like pyramid rationalisation, lower sub-con costs and optimising IP margins."

The brokerage has also claimed that "PSYS' 2QFY22 revenue of USD182m grew a robust 9.3% QoQ (+34% YoY), above IIFL expectations of 8.2% QoQ growth. The Services unit delivered strong sequential growth of 10.1% QoQ (+40% YoY). Growth was likely aided by ramp-up of deals won earlier. The IP-led unit rebounded, to grow at 4.2% QoQ and 3.2% YoY, after two-quarters of decline. Among verticals, BFSI saw robust sequential growth of 8.9% QoQ (+28.9% YoY) on the back of 11.7% QoQ growth in 1Q; Healthcare too saw growth, of a staggering 13% QoQ (+47.1% YoY), on the back of 15.9% QoQ growth in 1Q. Tech & Emerging vertical grew 7.9% QoQ (+32% YoY). EBIT margins stood at 13.9% (-20bps QoQ), above IIFL expectations of 13.4%, despite the full impact of wage hikes during the quarter (~230bps)."

According to the brokerage's call "In the past 4 quarters, PSYS has won deals worth 150% of FY21 revenues, executable in the next 12 months. Its headcount also grew, by 47% YoY in 2Q, and is a key leading indicator of growth for the coming 12 months. A combination of improved revenue visibility (29% Cagr in FY21-23ii) and steady margin improvement over the next two years will drive 39% EPS Cagr over FY21-23ii. Our EPS for FY23ii-24ii rises by up to 7%, on higher revenues, while getting cut by 4% for FY22ii, to incorporate the recently-announced acquisitions and ESOP plan. Hence, our 12-mth TP rises to Rs5,058 based on 35x 2YF P/E (unchanged). We continue to believe that PSYS has the highest potential for earnings upgrades, even though we are 5-13% above Bloomberg consensus EPS for FY22ii-24ii. PSYS remains our top pick in the mid-cap space, with further scope for rerating."

MindTree (MTCL)

The stock potentially hit a target price of Rs. 5,140 in a year, a rise of 16 percent from its current market price of Rs. 4,400-4,460, according to the brokerage. IIFL Securities in its research report has said that "MTCL's revenue growth QoQ was led by Retail (+29.6%) and Travel (+14.4%); BFSI saw further uptick (+8.4%), while Tech grew 5.6% QoQ despite flat growth in the top client. The top 2-10 and non-top-10 clients grew at 16-18% QoQ, demonstrating the breadth of growth in the client buckets. Deal wins of US$360mn were healthy, with TTM book-to-bill ratio at 1.27x, giving reasonable visibility on growth despite a fairly strong 1H delivery. 2QFY22 EBIT margin stood at 18.2%, (+50bps QoQ), above IIFL estimate of 17%. EBITDA margin expanded 20bps QoQ. Margins saw tailwinds from strong revenue growth and operational efficiencies of 190bps, partially offset by headwinds of 140BPS from wage hikes and of 30bps from cross currency. Pricing for the quarter remained stable. Offshore effort mix further increased by 150bps QoQ to 85%, while utilisation was stable at 82.9% (-30bps QoQ). Headcount addition was again strong, at 2.5k net employee addition (+9% QoQ)."

According to the brokerage's call "MTCL's deal wins are improving and there is a sharp recovery in the top clients too now, driven by a rebound in their consumer facing verticals. Margin execution has been strong, despite strong hiring. The stock trades at 36x FY23ii P/E, at a premium to mid-cap peers but with a strong FY22 outlook. We maintain BUY with a target of Rs. 5,140 as we still expect the earnings upgrade to continue in the near term."

Disclaimer

The stock has been picked from the brokerage report of IIFL Securities Limited. Investing in equities poses a risk of financial losses. Investors must therefore exercise due caution. Greynium Information Technologies, the author, and the brokerage house are not liable for any losses caused as a result of decisions based on the article.