Sharekhan, a leading brokerage has come up with the report on Q1FY22 Results Review and in it has listed the sectors it is positive on together with the stock picks from the respective sectors. In the IT space, the brokerage's preferred stock picks are Infosys, HCL Tech, Tech Mahindra, L&T Infotech, Mastek, Persistent Systems and BirlaSoft.
The brokerage firm is of the view that after ending Fy2021 on a strong note, earnings of the Q1 of FY22 period of broader indices showed a promising start. "Sensex companies' PAT rose 100%/66% y-o-y) in the new fiscal with strong growth momentum on low base. Management commentaries on earnings outlook remained positive, on improving economic activity post second COVID-19 wave and anticipation of strong demand revival. Demand recovery and ramp-up of vaccinations look encouraging. We expect economic activity to increase in the upcoming festive season. Nifty trades at 23x and 20x EPS based on FY2022E/FY2023E EPS, at a premium to mean average. Valuation gap between large and mid-caps has shrunk, we advise investors to focus on stocks with strong earnings growth potential with reasonable valuation", added the brokerage in its report dated August 31, 2021.
Now coming to the core sector of discussion:
Tier I IT companies’ recorded the best quarter in terms of aggregate revenue growth
"Nonetheless, mid-tier players clocked better revenue growth. EBIT margins of most companies declined q-o-q due to wage revisions, strong hiring and rising discretionary expenses. Attrition rate too rose amid strong demand environment. Strong demand is led by higher adoption of digital transformation, increase in offshoring and higher spend on core transformation. Managements expect to offset some margin headwinds by strong growth, higher offshoring and pricing benefits", said the brokerage report.
Outlook strong for the IT sector
Demand environment remains robust and is helped by the boost in digital transformation including cloud and business transformation, greater focus on higher outsourcing by global clients and an increase in offshoring after the pandemic, rising spends on core transformation. "Large digitisation deals and growth in core markets such as Europe are expected to drive growth in the next 2-3 years. Cloud and advanced analytics remain the prime focus areas among enterprise", says the brokerage report.
We believe most companies are well-equipped to offset some those margin headwinds from levers such as strong revenue growth, higher offshore mix, employee pyramid rationalization and pricing benefits. We maintain a Positive stance on the sector as Indian IT industry is well poised to maintain its growth momentum because of strong deal momentum, broad based traction across industries and strong partnerships with hyperscalers.
Top stock 'Buys' of Sharekhan from the IT space
Large cap stocks:
Infosys, HCL Tech, Tech Mahindra, TCS, Wipro
Mid-cap: L&T Infotech, Birlasoft, Intellect Design, Mastek, Persistent Systems, L&T
Tech, L&T Tata Elxsi and Expleo Solutions
Outperformers of Q1Fy22 period: Wipro, Persistent Systems, Tata Elxsi, Mastek, Infosys, L&T Infotech and Tech Mahindra.
IT Stock Picks Of Sharekhan together with their Price Target
The above report has been collated from Sharekhan report and is for informational use only. Readers should not construe it to be an advice for investment. Remember stock market investments are subject to high risk.