Top 7 IT stocks to buy: Brokerage shares top picks

The Indian IT sector has corrected significantly over the past nine months, with Nifty IT correcting -31% CYTD vs. a -2.5% correction in Nifty. The stock price correction has largely been due to the derating of valuation multiples, as earnings estimates have mostly remained intact or seen minor downgrades.

“Q2FY23 is expected to be a reasonably strong growth quarter for Indian IT players given the challenging macroeconomic scenario in US/EU. Growth momentum is expected to continue with Tier-II players outperforming Tier-I players yet again. Rupee has sharply depreciated against USD in Q2, but the benefit will be partly offset by USD also appreciating against other currencies (EUR, GBP & AUD) resulting in higher than normal cross currency impact, much like Q1,” the note stated.

Brokerage and research firm PhillipCapital's top stock picks remain Tata Consultancy Services (TCS) & Infosys (amongst Tier-I) and Mindtree, Persistent, LTI and Coforge (amongst Tier-II).

The brokerage house has Buy rating on TCS shares with a target price of ₹4,200 apiece, Infosys (TP: ₹1,930), Larsen & Toubro Infotech or LTI (TP: ₹5,440), Mindtree (TP: ₹4,350), Coforge (TP: ₹5,010), Persistent Systems (TP: ₹4,420), and Mphasis (TP: ₹3,080).

"A weakening global macro environment has principally led the correction – something we call ‘Top-down’ fears. While the global macro fears are for real, we believe their impact on earnings will be minimal and temporary. All the bottom-up indicators remain positive. Additionally, a US/EU/global recession (if and when) will only boost the long-term growth potential of these companies, as it has historically," it added.

Margins should remain stable on a quarter-on-quarter (QoQ) basis, for most companies (except ones with wage hikes like MTCL, LTTS, PSYS, KPIT etc) on stabilizing attrition and operating leverage, driven by growth and utilization, PhillipCapital said. 

“We expect sector companies to report CC revenue growth of 2.1% to 7.1 % with high cross currency impact. Infosys, Mindtree, Persistent and KPIT Tech are expected to lead the pack with 5.3% to 6% organic CC qoq growth while Tech Mahindra is expected to lag with 2.1% CC qoq growth,” the note stated.

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