Why HDFC Securities is bullish on IT sector? Its top picks2 min read . Updated: 11 Sep 2020, 10:54 AM IST
Centre of gravity is expanding beyond the tier 1s as mid-tiers are showing symmetry in balance sheet metrics.
HDFC securities maintains its positive outlook on the IT sector. The broker believes the centre of gravity is expanding beyond the tier 1s as mid-tiers are showing symmetry in balance sheet metrics. From the lows of March, the BSE IT sector index has moved up by 65%. Year-to-date, the index is up by 20%. The sector is poised for for higher multiples led by the longevity of high-growth period (current valuations imply ~5% 10-year CAGR) with ‘multi-year’ growth tailwind from the economic crisis, the continuity of high (increasing) payouts, and global ‘best in class metrics’ across growth, free cash generation, and balance sheet strength, says the HDFC Securities Report. Top picks of the broker include Infosys, HCL Technologies, L&T Infotech, Mphasis and Sonata Software.
Here are the key takeaways of the report:
Infosys: HDFC Securities maintains BUY on Infosys with a target price for the stock at ₹1,075. Current price of the stock is ₹934. "We maintain BUY supported by healthy deal activity supporting growth visibility and revenue outperformance in FY21E, resilience in core geography and operational rigour, aided by cost optimisation and the benefits of accelerated onsite investments to accrue.
HCL Technologies: The stock is trading at ₹712. HDFC Securities maintains a BUY rating with a target price of ₹770. HCLT's prowess in cloud infra business is a strong competitive advantage with enterprises accelerating cloud adoption and higher annuity streams. However, the trade-off of the acquisitive growth model (including IPPs) with organic growth and impacting FCF/return metrics remain the key risks ahead, said the report.
L&T Infotech: "We maintain ADD on L&T Infotech (LTI), supported by growth leadership within the sector (17% EPS CAGR over FY20-23E) and superior/stable operating profile," said the report. The stock is currently trading at ₹2,498. The brokerage house has set a target pric of ₹2,750.
Mphasis: "We maintain BUY on Mphasis, supported by high revenue growth visibility and a stable operating profile," said the Report. At present, the stock is trading at ₹1,153. The brokerage house has set a target price at ₹1,450.
Sonata Software: HDFC Securities maintain BUY rating on Sonata basis relatively stable portfolio ex-travel, focus on high growth Microsoft ecosystem, opportunity i the Dynamics modernisation program, IP-led business model and highest margin in Tier-2 IT. "A gradual recovery in top travel client and traction in Microsoft related services (Dynamics 365) would lead to growth in 2HFY21. The impact on margins is minimal; operational efficiency, cost-cutting, resource re-allocation and offshoring should keep the margin in the desired range of 20-21%," said the Report. The stock is currently trading at ₹312. HDFC Securities has set a target price of ₹370.