IT stocks in focus ahead of June Qtr results; TCS, Cyient top buy which could give 15-18% return

The brutal winter of discretionary spend cuts in the IT industry is likely over, but there is little evidence of a recovery in the flow business. Hence, we are on track for one of the weakest first quarters for at least 10 years.

We expect the revenues of IT services companies to recover following a tepid 4QFY24 for the industry, as the ramp-up of large cost-takeout deals could drive growth for large-caps in a seasonally strong quarter.

The situation, though slightly better, is eerily similar to what we witnessed in 1HFY24. We would be looking for signs of recovery in discretionary spending in the form of deal activities, which have been heavily skewed towards cost-takeout projects. However, any disappointment in 1QFY25 could again put pressure on 2Q.

We believe mid-tier companies could continue to perform well, especially those with strong offerings in “pre-GenAI” spending, such as data engineering.

We expect aggregate revenue/EBIT/PAT to grow by 3.2/5.2/6.1% respectively (all in INR terms) yoy for our coverage universe.

Verticals such as BFS and Communications have been under pressure for the past 5-6 quarters; and while spending patterns remain largely unchanged, deal wins over the past couple of quarters should start accelerating in this quarter.

This should offer some respite to growth rates for these verticals, especially for Infosys as the base becomes more favorable. Hi-tech, following a brief recovery, might face challenges, as spending on software moderates. We expect no changes in guidance/commentary from companies on FY25 revenue growth.

The focus of the commentaries is likely to remain on demand pick-up in 2HFY25, indicating a more normalized FY26 spending environment. We expect revenue growth of Tier-I companies to be in the range of -0.5% to +2.0% QoQ in CC. Revenue of Tier-II players is expected to grow by -1.5% to +5.0% QoQ in CC terms.

The near-term macro uncertainties and no meaningful sign of recovery in discretionary IT spending are key concerns for large-cap names; however, we expect mid-tier players to continue their outperformance.

Margins for the sector are likely to remain largely range-bound. The benefits from deferring wage hikes and benign currency movements could be offset by the ongoing challenge of recovering lost volumes.

The first quarter is also anticipated to be affected by visa costs, leading to a slightly negative bias for the quarter.

We believe FY25 will be a year of restrained wage hikes across the industry. Moreover, given the gradual nature of demand recovery, companies can adopt a more cautious approach towards their hiring strategies. This should lead to better margin defense for the sector.

TCS: Buy| Target Rs 4,660| Stop Loss Rs 4,021| Upside 15%

Given its size, order book and exposure to long-duration orders and portfolio, TCS is well positioned to withstand the weakening macro environment and ride on the anticipated industry growth.

Owing to its steadfast market leadership position and best-in-class execution, the company has been able to maintain its industry-leading margin and demonstrate superior return ratios. The pent-up demand in BFSI should drive growth over the near and medium term.

Cyient: Buy| Target Rs 2,160| LTP Rs 1,827| Upside 18%

Among Tier-II players, Cyient is poised for robust performance. This will be supported by the revival in the aerospace vertical, the moderating challenges in sectors such as railways and communications, and a strong portfolio in its sustainability business. Additionally, the macro recovery should contribute incrementally to its overall growth in FY25E/FY26E.



(The author is Head – Retail Research, Motilal Oswal Financial Services Limited)

(Disclaimer: Recommendations, suggestions, views, and opinions given by experts are their own. These do not represent the views of the Economic Times)