IT sector: Brokerages divided; maintain opposite stance on TCS, Infosys and HCL Tech; check target prices

Information Technology (IT) sector has been facing pressure on margins amid high attrition. The pressure on margins has reportedly also forced many IT companies to resort to variable payout cuts. Brokerages feel IT companies witnessed moderation in growth, however, they believe demand in the sector remained robust and long-term growth is almost intact.     

As per Motilal Oswal, IT sector saw some moderation in growth on the high base of FY22. Though demand environment remained strong, a few companies noted small pockets of demand weakness led by ongoing macro headwinds, especially in retail, it pointed out. 

Digital transformation and cloud migration remained in focus for enterprises to fuel their growth, says the brokerage.  

"The companies’ strong order book and pipeline render comfort on near-term growth. Long-term growth too is expected to remain resilient because of prominent digital and cloud transformation initiatives by clients." 

Meanwhile, global brokerage houses were divided on the sector, and sees different targets for three major IT companies—TCS, Infosys and HCL Tech.  

Macquarie maintained an overweight rating on the top IT companies, while JP Morgan either downgraded the rating or maintained an underweight stance on these IT stocks.  

Macquarie on TCS, Infosys, HCL Tech 

As per the brokerage house, there was not much pressure on income and margin estimates now. It was of the view that cost on salary has been factored in and attrition is already at its peak. 

Maintaining an outperform rating, Macquarie gave the following targets on these stocks.  

TCS: Outperform – Target Price: Rs 4150 

Infosys: Outperform – Target Price: Rs 1870 

HCL Tech: Outperform – Rs 1420 

JP Morgan on TCS, Infosys and HCL Tech  

The global brokerage either maintained un underweight stance or downgraded the stock. It remains bearish on these stocks in view of the expected pressure on the margins of these companies. It says pressure on margins is likely to increase amid rising costs on salaries. Its bearishness was based on the fact that most of the IT companies saw steep fall in margin.  

TCS: Underweight – Target Price: Rs 2800 

Infosys: Downgrade to Neutral from Overweight – Target Price: Rs 1600 

HCL Tech: Underweight – Target price Rs 800