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Business News/ Markets / Stock Markets/  Jefferies is cautious on Indian IT sector. This stock is its only 'Buy' pick
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Jefferies is cautious on Indian IT sector. This stock is its only 'Buy' pick

Jefferies remains cautious on the Indian IT sector with Infosys its only stock pick

AFPPremium
AFP

During Q3 FY23, global brokerage Jefferies expects aggregate revenues for its Indian IT coverage to moderate sharply to 1.4% sequentially (QoQcc), with HCL Technologies and LTIMindtree leading growth. Margins for other IT firms are likely to be steady QoQ as slower growth will offset benefits of improving pyramid and easing attrition, it said. 

“We expect aggregate margins to rise by 50bps QoQ led by improving pyramid, utilization and easing wage pressures. Expect Coforge and HCLT to witness the highest margin expansion. Focus will be on demand outlook, nature of deals, pricing and attrition trends," the note stated. Jefferies remains cautious on the Indian IT sector with Infosys its only stock pick.

Accenture's recent results indicated rising caution with shift in client focus towards cost optimization projects vs. growth projects. Amidst macro uncertainty, focus will be on management commentary on the demand environment.

“Commentary around deal pipeline, sales cycle, nature of deals and deal tenure, pricing, and vendor consolidation will be keenly watched. Furthermore, there will be a strong focus on commentary around client budgets or re-prioritization of client spends. While revisions to FY23 guidance of Infosys, HCL Tech, and Coforge will also be closely watched, we don't expect this to be revised in 3Q," the brokerage highlighted.

Accenture's implied revenue growth guidance of 5.6-9.6% YoYcc in 2HFY23 vs. 25% YoYcc in 2HFY22 implies sharp moderation in revenue growth for Indian IT in FY24.

Given this, Jefferies believes risk/reward is unfavorable as IT stocks still trade near +1 standard deviation above their 10-year average and 15% premium to Nifty, and has maintained its cautious stance with Infosys its only BUY (target price of 1,710).

“We expect 3QFY23 revenue growth to be soft at 0.6% QoQcc due to higher than expected furloughs. Ebit margins will likely be flattish QoQ due to limited operating leverage due to muted growth. Expect large deal bookings to be in the range of $2bn - $2.5bn. We expect Infosys to retain its 15-16% YoYcc revenue growth guidance and 21-22% margin guidance for FY23," said Jefferies.

The views and recommendations made above are those of individual analysts or broking companies, and not of Mint.

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Published: 02 Jan 2023, 09:57 AM IST
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