IT sector: Demand remains strong, but the position remains cautious; Infosys and Tech Mahindra are the best buy ideas, avoid this computer stock

IT stocks remained under pressure all week after IT giant TCS missed Street’s estimates. Last Friday, Tata Consultancy Services (TCS) announced a 5.2% increase in net profit for the June quarter to Rs 9,478 crore, limited by the impact of annual salary increases and promotions which have reduced margins earnings operating at multi-quarter lows. These are the operating profit margins of the

The Tata Group company slid to 23.1%, well below the ambitious band of over 26%, which hurt earnings growth.

With TCS T1FY23 numbers weaker than expected, the IT sector remained under pressure, which was reflected in the IT indices. Nifty IT remained the big loser with a 6.2% reduction on the NSE

in the week ended July 15, while BSE Information Technology ended down 5.8% on BSE in the same period.

Meanwhile, global brokerage firm Nomura maintained a cautious stance on the IT services sector. He expects a significant moderation in the revenue growth rate of Indian IT companies in FY24F compared to FY23F.

Nomura’s downtrend to the sector finds relevance in headwinds on large-cap IT margins, given supply-side pressures, particularly from higher wage increases than usual in on-premises sites, high attrition and the return of discretionary spending like travel.

“Fiscal 23F will be marked by greater disappointment in margins and fiscal 24F by disappointment in revenue growth, both of which should be adequately priced by consensus,” he said.
IT stocks to buy

Speaking of stocks to buy in the IT space, he prefers large-cap IT stocks to mid-cap stocks. He recommended Infosys and Tech Mahindra as preferred stock picks, while suggesting avoiding TCS stocks, calling it a “cut back” idea.

Earlier, ISG (Information Services Group), during the call on the 2Q CY22 index in which the global brokerage participated, ISG noted that macroeconomic uncertainties continue to increase significantly, which is likely to weigh on technology budgets in CY23E. He expected some decline in technology budgets in CY23E.

“The slowdown in hiring by big tech companies and corporate caution continue to point to heightened uncertainty in the short to medium term,” ISG said.

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