Nifty IT Index Shows Slight Outperformance Amid Macroeconomic Concerns

Nifty IT Index Shows Slight Outperformance Amid Macroeconomic Concerns
Nifty IT Index Shows Slight Outperformance Amid Macroeconomic Concerns
Nifty IT Index Shows Slight Outperformance Amid Macroeconomic Concerns
Nifty IT Index Shows Slight Outperformance Amid Macroeconomic Concerns

Nifty IT Index Shows Slight Outperformance Amid Macroeconomic Concerns

Nifty IT Index Shows Slight Outperformance Amid Macroeconomic Concerns

Nifty IT Index Shows Slight Outperformance Amid Macroeconomic Concerns

Despite the challenging macroeconomic environment, IT service companies have begun to exhibit a slight outperformance on a one-year basis, with the Nifty IT Index gaining over 17%. This surpasses the benchmark Nifty 50, which has recorded an approximately 13% increase.

While macroeconomic uncertainties persist and may continue to impact the sector in the short term, especially with the rise in cost take-out deals favoring tier-1 companies, select well-diversified tier-2 companies could maintain their resilience and reap the benefits, according to analysts at Sharekhan, a brokerage firm.

The report from Sharekhan suggests that long-term digital transformation programs are expected to gradually return as macroeconomic headwinds subside, likely after peaking in the next couple of quarters. However, due to ongoing macroeconomic concerns, substantial outperformance in the sector may be delayed following the recent rally. Sharekhan advocates a Neutral rating on the sector and advises selective investment in preferred picks.

Expectations for the Second Quarter of FY24

In the second quarter of FY24, Sharekhan anticipates that the persisting uncertainty will lead to another subdued quarter, even during a seasonally strong period for tier 1 companies. Tier 1 firms are expected to report constant currency (CC) revenue growth ranging from -0.4% to 1.1% QoQ, while a few select outperforming tier 2 companies may experience some moderation, with CC revenue growth of 1.5% to 4.4% QoQ.

Preferred Midcap IT Stocks

Sharekhan has identified several preferred picks among midcap IT stocks in the sector:

  1. Persistent Systems – The company is expected to report sequential revenue growth of 3.1% in CC terms in Q2FY24, primarily driven by deal ramp-ups. However, the EBIT margin is likely to decline by around 90 bps QoQ due to wage hikes offset by operational efficiencies. Sharekhan maintains a ‘Buy’ rating on the stock with a target price of ₹6,000 per share.
  2. Coforge – Coforge is anticipated to achieve sequential revenue growth of 2.8% in CC terms in the July-September 2023 quarter, aided by deal ramp-ups. EBIT margin is expected to improve by approximately 190 bps QoQ due to operational efficiencies following a sharp decline in Q1FY24. Sharekhan has a ‘Buy’ call on Coforge with a target price of ₹6,200 per share, implying an upside of over 19% from the previous closing price.
  3. Mastek – Mastek is projected to report sequential revenue growth of 4.4% in CC terms, supported by the acquisition of BizAnalytica. The company’s net profit is expected to rise by 11% sequentially to ₹78 crore in the quarter ending September 2023, while EBIT margin may decline by around 60 bps QoQ. Sharekhan maintains a ‘Buy’ rating on the stock with a target price of ₹2,400 per share.
  4. Birlasoft – Birlasoft’s revenue is likely to grow by 1.9% in CC terms sequentially during Q2FY24, primarily due to deal ramp-ups. The EBIT margin may remain flat, supported by operational efficiencies, but the net profit is expected to drop by 2.1% QoQ. Sharekhan has a ‘Buy’ rating on the stock with a target price of ₹525 per share.

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