Last week, the Indian benchmark indices saw a significant increase. The Sensex and the Nifty 50 both increased by more than 2%. The recent strong rally has broken the sideways trend that had been in place for some weeks. Following the announcement of these firms' Q2FY22 results, HDFC Securities released four IT stock picks.
HDFC Securities sees an upside on the stock of Infosys from the current market price of Rs 1,709 The firm has set a target price of Rs 1,995 on the stock.
"We maintain BUY on Infosys (INFY), following the beat on both revenue and margin and a strong growth outlook. Revenue growth guidance for FY22E was increased to 16.5-17.5% CC (14-16% earlier) and the EBIT margin band was maintained at 22-24% (despite the near-term supply crunch)," the brokerage has said.
Infosys- Growth engine revving up
According to brokerage, for FY22/23/24E, we've assumed USD revenue growth of 18.5/13.8/10.1 percent, with Q3FY22 at 4% QoQ. For FY22/23/24E, the EBIT margin is expected to be 23.4/23.2/23.5 percent. The stock is valued at 25.1x FY24E (an 8% discount to TCS), with an EPS CAGR of 13.9 percent for FY21-24E. With >13 percent EPS CAGR and >40 percent RoIC, we remain positive on INFY (top choice in tier-1 IT), valuing the business at INR 1,995 based on 30x Dec-23E EPS.
1) INFY reported revenue growth of +6.3% on a quarter-over-quarter and year-over-year basis. Digital revenue increased by 10% quarter over quarter in USD terms, but core revenue remained constant.
(2) EBIT margin fell 12 basis points QoQ to 23.6 percent, owing to salary increases, higher subcontracting and hiring costs, which were somewhat offset by improved utilisation (+100 basis points QoQ) and a favourable foreign exchange rate.
(3) Attrition has risen to 20.1 percent and is expected to remain high.
(4) In Q2, five of the 22 significant agreements won were in the BFSI/ENU sector, three in retail and manufacturing, and three apiece in communication/hi-tech. There were fifteen agreements in the United States, six in Europe, and one in the Rest of the World.
HDFC Securities sees an upside on the stock of Wipro from the current market price of Rs 673. The firm has set a target price of Rs 690 on the stock.
Wipro had a solid revenue performance in the second quarter, with organic growth of 4.6 percent QoQ (following +4.8 percent) exceeding guidance and expectations. Wipro's growth engine has been resurrected, and its organic growth for FY22E (16 percent YoY) has been aligned with that of larger peers. The deal pipeline is still strong, with a fair mix of significant transactions.
Wipro : Continued growth momentum
"We increase our revenue estimate for FY22/23E by +1.4/2.5% to factor in better growth visibility. Our target price of INR 690 is based on 24x Dec-23E EPS (~20% discount to INFY). The stock is trading at 27/22.4x FY23/24E EPS. Maintain ADD", the brokerage said.
According to brokerage, For FY22/23E, factored in +27.6/+12.8 percent USD sales growth, implying a 3 percent CQGR in Q2-Q4FY22. For FY22/23E, the IT services EBIT margin is estimated to be 18.2/18.5 percent, resulting in an EPS CAGR of 15.1 percent over FY21-24E.
(1) Revenue growth of 6.9% QoQ (estimated +5.5%) was above the guided range;
(2) EBIT margin for IT services was 17.8% (-126 bps QoQ, estimate of 18.5%), impacted by two months of wage increases for senior executives and rising attrition;
(3) BFSI/communication/consumer/technology verticals led growth;
(4) Offshoring stood at 55.6 percent.
HDFC Securities sees an upside on the stock of HCL Technologies from the current market price of Rs 1251. The firm has set a target price of Rs1,450 on the stock.
"We maintain BUY on HCL Tech (HCLT), supported by strong growth in services (+5.2% QoQ CC) and healthy deal wins. The miss in P&P (-8% QoQ) is a one-off, from which it should recover in Q3," the brokerae has said.
HCL Technologies: Deal wins to boost growth
(1) HCLT's revenue growth of 3.5 percent QoQ CC was little lower than our expectations.
(2) The IT&BS segment increased +5.2 percent QoQ CC (driven by app modernisation and cloud transformation), ER&D grew +5.4 percent QoQ CC (driven by digital engineering), and goods & platform grew -8 percent QoQ CC (due to deal postponement).
(3) Manufacturing and biological sciences led vertical growth, offsetting flat growth in financial services and retail and consumer packaged goods.
(4) HCLT announced a new TCV of USD 2.25 billion, consisting of thirteen significant services deals and one product win.
According to brokerage, for FY22/23/24E, we've assumed USD revenue growth of +12.2/13.3/11.5 percent, IT&BS growth of +15/14/12 percent, ER&D growth of +12/13/12 percent, and P&P growth of +0/6/7 percent. Over the same time, EBIT margins are expected to be 19.4/20.5/20.7 percent, equating to an EPS CAGR of 14 percent (TCS/INFY/WPRO at 14/14/15 percent CAGR). With a 5% FCF yield and a 25% RoIC, the valuation is reasonable at 18x FY24E.
HDFC Securities sees an upside on the stock of Cyient from the current market price of Rs 1160. The firm has set a target price of Rs1,330 on the stock.
"We increase our EPS estimate by +5.8/6.3% for FY23/24E, based on an expected recovery in core business and margin beat. Our target price stands at INR 1,330, based on 22x Dec-23E EPS. The stock is trading at 21.2/18.7x FY23/24E, a discount of ~50% to LTTS. Maintain BUY," the brokerage has said.
Cyient - Improving growth vectors
For FY22/23/24E, we've assumed +11.7/+15.5/+13.6 percent USD revenue growth, with FY22E implying +10.5/+17.8% growth in services/DLM.
(1) USD revenue increased 4.6 percent QoQ versus 3.9 percent expected; core services/DLM revenue increased 4.9/5.7 percent QoQ;
(2) services EBIT margin improved 90bps QoQ to 15.5 percent, boosted by operational efficiency and revenue mix, partially offset by wage hike and higher SG&A;
(3) additional impact of merit increase will c
(4) DLM margin was 6.8%, up 99 basis points from the previous quarter;
(5) the company secured six significant orders totaling USD 63.5 million in TCV, four of which were in services and one in DLM.
The above stocks to buy are picked from the report of HDFC Securities. Please note investing in stocks is subject to market risks and one needs to be cautious at this point of time as markets have gone-up sharply. Neither the author, nor Greynium Information Technologies Pvt Ltd would be responsible for losses incurred based on a decision made.