Buy 1 Small Cap & 2 Large Cap IT Sector Stocks For Returns Up To 23%, Suggested By HDFC Securities

Three leading IT sector companies, namely Infosys Limited, Mindtree Limited and Cyient Limited recently announced their Q2 FY23 results. Post result announcement, HDFC Securities has assigned a "Buy" call on the stocks for potential returns of up to 23%. The brokerage in the report has highlighted the Q2 FY23 results of the companies. Here are the key takeaways of the report.

1. Infosys Limited

Infosys (INFO) posted in-line revenue performance and a beat on margins in Q2FY23. Revenue growth of 4% QoQ and 18.8% YoY CC and strong large deal bookings of USD 2.7bn led to a change in revenue guidance to 15-16% CC for FY23E (vs. 14-16% guided earlier).

Key positives in INFO's Q2 were (1) net-new large deal bookings for Q2 at USD 1.4bn (H1FY23 net-new large deal bookings up 47% YoY) driving growth visibility for H2; (2) digital at 61.8% of revenue growing 31% YoY CC (although sequential deceleration), including Q2 cloud revenue at USD 1bn+; (3) positive commentary on deal pipeline (higher than last two quarters) reflecting deal funnel replenishment despite prevalent macro; (4) net headcount addition of 10k or ~3% in Q2 with 40k fresher addition in H1 and the company expected to surpass annual fresher intake plan; and (5) operational improvement led by sub-contracting optimisation and better large contract profitability (improvement in manufacturing vertical margin) increasing the certainty to hit 21%+ EBITM for FY23E with added levers (utilisation, rate card in digital). Nonetheless, management cautioned on select verticals (communication & hi-Tech, mortgage and retail sub-segment) citing instances of slower decision cycle.

Maintain BUY on INFO (top pick in tier-1 IT), with a Target Price of INR 1,790, based on 26x June-24E EPS. 

Stock Outlook, Returns & Potential Upside

• Infosys is one of India's leading large-cap IT sector companies having a market capitalisation of Rs 6,20,208 crore.
• The Current Market Price (CMP) of the stock stood at Rs 1,474.25 per share after gaining 4.02% on Friday. 
• It has given 14.08% negative returns in the past 1 year, 87.54% positive returns in the past 3 years, and 217.01% of multibagger returns in the past 5 years.
• The stock is likely to gain 22% from its current level considering the stock's given target price i.e., Rs 1,790 per share.

2. Mindtree Limited

According to the brokerage firm, Mindtree (MTCL) posted a strong revenue and margin performance in Q2FY23; revenue was up 5.7% QoQ and 20.6% YoY.

Key positives for MTCL included (1) strong deal bookings of USD 518mn in Q2 (second-highest ever quarterly TCV, following the highest-ever in a seasonally strong Q1) and USD 1bn+ in H1FY23 providing growth visibility; (2) growth consistency of 5%+ with robust growth across verticals (ex-retail), service-lines (including customer success service line) and in T1 account; and (3) EBITDAM resilience supporting 27% YoY growth in EPS in Q2.

Near-term growth moderation is expected to be impacted by furlough in Q3 as well as integration with LTI. Growth drivers of synergies is on the anvil as the merger with LTI is expected to be completed in Q3FY23E.

Maintain BUY on MTCL, with a Target Price of INR 3,800, valuing the stock at 28x Jun24E EPS. 

Stock Outlook, Returns & Potential Upside

• Mindtree is a Larsen & Toubro Group Company. It is a large-cap IT sector company having a market capitalisation of Rs 55,711.38 crore.
• The current market price (CMP) of the stock after a gain of 1.97% on Friday is Rs 3,379.75 per share. 
• The company has reported 27.96% negative return in the past 1 year, 362.63% multibagger return in the past 3 years and 597.5% multibagger return in the past 5 years, respectively.
• The brokerage claims a potential upside of around 13% from its current level considering the given target price of Rs 3,800 per share.

3.Cyient Limited

According to the brokerage firm, Cyient reported a decent quarter; revenue was up 10% QoQ CC (in line with estimate), led by core services (+12.3% QoQ CC, +3% organic). The services growth was driven by the aerospace vertical and new growth areas like automotive and mobility. Investments in new areas (EV and mobility) will help the company align its growth with the industry. Aerospace will continue to deliver growth and communication will revive, led by 5G network rollout. Transportation (railways) and utilities continue to drag growth and some respite is likely in H2.

"The company has announced restructuring/demerger of the DLM business, which we believe is a positive step. The deal wins remain strong for the DLM business and a total TCV of USD 105mn indicates a positive momentum. Management guidance of 13-15% YoY CC organic growth and EBIT margin of 13-14% appear encouraging. The margin expanded 40bps QoQ, led by a better margin in services and DLM. We increase our FY24E EPS estimate by ~1.2% and maintain our BUY rating. Our target price of INR 935 is based on 16x June-24E EPS. The stock is trading at 16/14x FY23/24E, a steep discount of ~50% to ER&D peers (LTTS)," the brokerage has said. 

Stock Outlook, Returns & Potential Upside

• Cyient is a global engineering and technology solutions company in the IT sector. It is a small-cap company having a market capitalisation of Rs 8,386.35 crore.
• The stock of the company is currently trading at Rs 759.95 per share on the NSE. On Friday, it fell 1.38% from its previous close.  
• It has given 4.91% negative return in the past 1 week. Over a year, the stock has given 34.48% negative return. In the past 3 years, it gave 65.8% positive returns and in the past 5 years, it gave 40.98% positive returns, respectively.
• According to the given target price i.e., Rs 935 per share, the stock is likely to surge 23% from its current level.

Disclaimer

The stocks have been picked from the brokerage report of HDFC securities. Greynium Information Technologies, the Author, and the respective Brokerage House are not liable for any losses caused as a result of decisions based on the article. Goodreturns.in advises users to check with certified experts before making any investment decision.