The Nifty IT Index has surged 32% last year, with the recent outperformance driven largely by a healthy first quarter, especially from Tier-1 IT companies on revenue growth and margin fronts and stable management commentaries.
Given healthy deal pipelines and strong management commentaries on FY25 guidance, domestic brokerage firm Sharekhan, in its report, stated that they are largely positive on the sector with selective investments as their preferred picks.
Among the largecaps, Sharekhan has listed TCS, Infosys, HCL Tech, LTIM, and Tech Mahindra as their preferred picks while Persistent Systems, Birlasoft, and Mastek are the top picks among the mid cap IT companies.
“Potential Fed rate cuts starting September could stimulate pent-up demand, thereby improving the recovery momentum. We have greater comfort in Tier-1 IT companies and select Tier-2 IT companies, given the recent healthy quarterly performance, improving management commentary, and relatively better valuations,” said analysts at Sharekhan.Tier-1 IT companies exceeded estimates, with the exception of Wipro while the tier-2 IT companies reported CC revenue growth of -3.1% to 5.6% Q-o-Q, with Persistent leading the pack. Tier-1 IT companies fared better on the EBIT margin front largely aided by operational efficiencies.Additionally, another domestic Centrum Broking said they were positive on the sector for the medium- to long-term owing to growing digitalization across enterprises and rising demand for Gen AI based solutions“Overall, IT companies reported modest financial performance led by near term challenges in the demand environment. Clients remain cautious with regard to the macroeconomic environment and discretionary tech spending remains weak. However, there are certain green shoots in the demand environment especially in the BFSI segment with improving clients’ interest for high priority IT projects,” said a report by Centrum.
However, they stated that the deal wins remained robust across companies with a higher number of longer duration deals.
IT companies continue to focus towards driving margin growth through improvement in employee pyramid, rationalization of wage hikes and other efficiency measures.
Further, a rising demand for generative AI-based solutions is expected as they are likely to lead to significant productivity benefits for clients across industries.
In the tier-1 IT space, TCS and Infosys are Centrum’s top picks, whereas they prefer LTIMindree and Coforge in tier-2 IT space.
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(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)