Even as the Nifty IT index remains the worst sectoral performer in 2022 so far, foreign brokerage Bernstein believes that Indian IT companies are equipped with levers such as higher offshoring and a better pyramid mix to support their margins. Besides this, the brokerage also cites lowering attrition as another margin lever.
Furthermore, it believes that the current scale of the business and flexibility in cost structure allows the Indian IT companies margin leverage. Salary costs have the highest mix within total costs with 50-55 per cent of revenues.
For Indian IT companies, EBIT margins driven by variables, including pricing power from customers, wage inflation, average currency rates and pyramid mix/offshoring. Now, amid headwinds from wage inflation, IT companies are using other levers, including operating efficiencies, utilization, and offshoring, to manage margins in the near to medium term.
Amid such a backdrop, the foreign brokerage has given a ‘Outperform rating on 3 IT counters and has listed
as its top pick. The brokerage also mentions that it prefers largecaps over midcaps.
The brokerage gave an outperform rating to Infosys with a target price of Rs 1880, potential upside of 38% from current levels. The rating on the counter is driven by deep digital positioning, strong growth momentum (13-15% FY23 YoY CC guidance) and attractive valuation (about 20% discount to
“Infosys margin guidance in FY23 is 21-23%. EBIT margin in Q1FY23 was a miss with margin headwinds from wage hikes (160 bps), lower utilization (40 bps) and sub-contractor costs (30 bps)”, added the report.
Bernstein values Infosys on an NTM P/E basis with a P/E multiple of 26x on FY24 EPS.
For the country’s largest IT service provider, Bernstein maintains an ‘outperform’ call with a target price of Rs 3890, which considering the current price of Rs 2981, potential gains of over 30%. Bernstein is bullish on the counter given its “robust billion dollar order book, resilient margins; however, valuations are keeping risk/reward in the balance”, noted the foreign brokerage. The brokerage value TCS on an NTM P/E basis with a valuation of 28x on FY24 EPS
Bernstein maintains an outperform rating on the counter with a target price of Rs 1240, an upside of 20% from current levels. “We value Tech Mahindra on an NTM P/E basis with a valuation of 22x on FY24 EPS”, the brokerage noted.
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)