Axis picks Coforge, Persistent Systems, and KPIT Tech in IT space post Q3 results
Axis believes that the said recovery will begin at the start of the new year and FY25 will show strong revenue growth. The brokerage has picked Coforge, Persistent Systems, and KPIT Technologies as its top IT sector picks post the December quarter (Q3FY24) results.
The Indian IT services industry is facing near-term challenges due to the economic slowdown and weaker macroeconomic outlook. However, its long-term outlook remains robust with the economy showing signs of recovery, said brokerage house Axis Securities in a recent note. It believes that the said recovery will begin at the start of the new year and FY25 will show strong revenue growth. The brokerage has picked Coforge, Persistent Systems, and KPIT Technologies as its top IT sector picks post the December quarter (Q3FY24) results.
Q3FY24 Review
The brokerage lists key POSITIVES
- Despite the delay in automation spending (especially from North America), deal wins remained strong during the quarter. Many Indian IT service companies sees the demand for new edge technology like generative AI, IoT Machine learning etc despite the lack of near-term visibility, said the brokerage.
- It also noted that the attrition rate has dropped as we see some easing on the supply-side constraints. This would help IT service companies improve their operating margins.
- Furthermore, Europe stood relatively strong as compared to North America. ER&D services remained resilient as compared to traditional IT services.
- Finally, the management of the majority of IT majors sees a pickup in demand from FY25 and likely to ramp up deals as soon as uncertainties will settle down, noted Axis.
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MISSES during the quarter
- Axis cautioned that growth visibility is likely to remain under pressure as the slowdown negatively impacts overall business activity.
- It further warned that delayed decisions have weakened revenue growth momentum, even if the deal wins remain resilient.
- Also, higher onsite expenses and rising costs have negatively impacted operating margins.
- Meanwhile, lack of visibility caused IT providers to slow down the hiring process, which impacted future revenue growth momentum, it added.
Outlook
After strong revenue growth momentum in FY22 and FY23, Axis believes IT services may face challenges on demand and margin fronts on account of the economic slowdown and macroeconomic uncertainties. However, it has a skeptical near-term outlook for North America (40 percent of revenue).
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It also stated that deal wins remained resilient even during the difficult times, which gives it confidence that automation spending will rebound strongly in the next couple of quarters. Demand in industries such as retail and manufacturing remains strong and is expected to regain momentum in the near future.
Also, the demand for newer technology services such as generative AI, machine learning, IoT, and cloud transformations remains stable and is likely to recover more quickly as certain macroeconomic challenges subside, said Axis.
It continues to believe that most IT services companies will regain momentum in a couple of quarters as deal wins remain resilient and supply-side challenges ease. The dovish stand taken by Federal Reserve may encourage macroeconomics in North America which may drive demand for Automation spend, added the brokerage.
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Stock Picks
Coforge: The brokerage has a buy call on the stock with a target price of ₹6,905. Axis said that it is encouraged by the improved outlook in the vertical and engagement with clients gives us confidence in the company’s future prospects.
The US is seeing higher cost optimization deals (with faster decision-making) while the Europe market remains impacted. As the macro environment stabilizes, the company expects decision-making to pick up. Coforge has also won deals across verticals indicating strong demand across geographies even during challenging times. It has strong execution capabilities and improved client engagement indicating a strengthened growth prospectus going ahead, noted Axis. It added that the majority of the verticals witnessed strong growth and are likely to report further growth backed by a strong deal pipeline in the near term. The recently stock has moved up however the brokerage remains confident about the company’s growth in the near future. Axis recommends buying on dips on the stock with the targeted price.
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Persistent Systems: The brokerage has a buy call on the stock with a target price of ₹9,570. Axis said that the Persistent Systems continues to report strong growth even during the challenging times with increasing client engagement.
Axis believes Persistent is well positioned to encourage growth given its numerous long-term contracts with the world’s leading brands. Improved revenue visibility gives us confidence in the company's continued growth. It upgraded the stock valuation from 35x FY26E earnings to 40x to its FY26E earnings, given the company’s strong growth potential, supported by solid deal-making and excellent execution capabilities.
KPIT Tech: The brokerage has a buy call on the stock with a target price of ₹1,750. Axis said that given the company’s strong growth potential, supported by solid deal-making and excellent execution capabilities.
Digital engineering spends are accelerating across industries, and companies moving from traditional to digital engineering will quickly adopt digital engineering. Major industries such as Manufacturing, BFSI, Media & Technology, Retail, Healthcare Payers & Providers, and Travel & Hospitality are developing new products and services to differentiate themselves in their respective industries, thereby creating remarkable opportunities for the company, noted Axis.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decision.
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