IT sector: Strong demand to continue, but stance remains cautious; Infosys, Tech Mahindra top buy ideas, avoid this IT stock

IT stocks remained under pressure this entire week after IT behemoth TCS missed street's estimates. Last Friday, Tata Consultancy Services (TCS) reported a 5.2 per cent rise in the June quarter net profit to Rs 9,478 crore, restricted by the impact of annual wage hikes and promotions that took operating profit margins to multi-quarter lows. It was operating profit margins of the

Tata Group company slid to 23.1 per cent, much lower than the aspirational band of over 26 per cent which hurt the profit growth.

As TCS Q1FY23 numbers came weaker than expected, the IT sector remained under pressure, which was reflected in the IT indices. Nifty IT remained the top loser with 6.2% cut on the NSE

in the week ended on July 15, while the BSE Information Technology ended lower by 5.8% on the BSE during the same period.  

Meanwhile, global brokerage firm Nomura has maintained a cautious stance on the IT services sector. It expects significant moderation in the revenue growth rate of Indian IT companies in FY24F vs FY23F.

Nomura's bearishness of the sector finds relevance in margin headwinds for large-cap IT, given supply-side pressures, particularly due to higher-than-usual salary hikes in onsite locations, high attrition and return of discretionary spends like travel.

"FY23F will be marked by more margin disappointment and FY24F by revenue growth disappointment, both of which need to be factored in by consensus adequately," it said.
IT stocks to buy

Speaking of stocks to buy from the IT space, it prefers Large-cap over midcap IT shares. It recommended Infosys and Tech Mahindra as its preferred stock picks, while it suggested avoiding TCS stock, calling it a top 'reduce' idea.  

Earlier, ISG (Information Services Group), in the 2Q CY22 Index call attended by the global brokerage, ISG noted that macro uncertainties continue to rise significantly which is likely to weigh on tech budgets in CY23E. It expected some pull-back on tech budgets in CY23E.  

"Slow-down in hiring by big tech companies and cautiousness amongst enterprises continue to point towards increased uncertainty in the near to medium term," the ISG underlined.