Analysts bet high on IT; divided on specific stocks post Q2 results

Lifetime high valuation show near term strength

After Q2 results of IT companies, brokerages continue to broadly be positive in the sector despite being divided on specific stocks. Overheated and lifetime high valuations of many stocks more than capture the near-term strength/predictability in earnings, ICICI Securities noted in its research report on Infosys, Wipro and Mindtree.

“Mindtree is now trading at 47x 1-year forward P/E (consensus) vs the pre-Covid long term average of 15x. Similarly, Wipro is now trading at 29x vs the pre-Covid long term average of 15x, even as Infosys re-rated significantly (now at 30x vs the historical average of 17x)”, ICICI Securities said.

Infosys continues to be this brokerage’s top buy in the IT sector. Infosys got a ‘Buy’ rating from brokerages like Emkay and Yes Securities among others.

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Leader in the tech space, TCS also got a ‘Buy’ rating from brokerages like Yes Securities, due to above-estimate revenue and EBIT margin, and noting that the booking remains strong and would support growth momentum for the company. On the other hand, ICICI Securities while giving TCS a ‘Buy’ signal also noted that the company has missed estimates on multiple levels and that there could be problems in the medium term.

“In seasonally the stronger half of the fiscal (H1), TCS clocked an underwhelming 3.2% CQGR (constant currency terms) vs the previous decadal average of 4.2%. If the normal seasonality of H2 is to play out, exit growth rates (CC, YoY) for FY22 will sharply decelerate to high single digits. This can be a big setback on the consensus expectations of sustained double-digit growth over the medium term. Some key segments driving growth throughout the T12M – BFSI, healthcare, Europe – slowed down considerably. Higher attrition led costs restricted margin resilience in a post wage hike quarter”, said ICICI Securities.

Meanwhile, Emkay Global has given TCS a ‘Hold’ rating post the Q2 results also noting the lower than expected revenues and higher attrition at 11.9% in the quarter compared to 8.6% in the previous quarter.

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This research firm has given a ‘Sell’ rating to Mindtree and ‘Hold’ to Wipro.

Mid-cap IT firm, Mindtree, analysts, are giving either a ‘Hold’ or a ‘ Sell’ signal. While Emkay has given it a ‘Sell’rating, ICICI Securities is giving it a ‘Hold’.

Both brokerages justify their ratings not because of Mindtree’s financials but because of its valuations.

ICICI mentions in its report that there is not much scope for the stock to rally after its 61% climb in three months.

Emkay Research says, “We maintain Sell on the stock with a revised TP of Rs 3,300 at 30x Sep’23E EPS (earlier Rs 3,070), considering rich valuations and anticipated pressure on margins.”

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