Emkay recommends these IT stocks to buy, upgrades TCS, Mphasis’ ratings

Tier-II companies outperformed Tier-I peers in sequential revenue growth as well as margin expansion. The IT companies’ margin expansion was aided by revenue growth-led operating leverage, offshore shift, and productivity improvement which offset salary inflation and supply-side challenges.

The brokerage house has upgraded TCS (Target price: ₹4,100) and Mphasis (TP: ₹3,730) to Buy, considering the recent stock underperformance. Its pecking order is Infosys (TP: ₹2,100), Tech Mahindra (TP: ₹1,930), HCL Technologies (TP: ₹1,420) and TCS among Tier-1 names, and Persistent Systems (TP: ₹5,000), Firstsource (TP: ₹230), Mphasis and Birlasoft (TP: ₹550) in mid-caps.

Meanwhile Emkay has Hold rating on Wipro (TP: ₹700), LTI (TP: ₹6,650), Mindtree (TP: ₹4,450), and Coforge (TP: ₹5,400). 

The brokerage further expects IT spending to remain strong across verticals, aided by a consistent surge in demand for cloud, data analytics, digital transformation, cybersecurity and AI. It also expects the revenue momentum seen in H1 to continue throughout FY22, led by secular broad-based demand trends and healthy deal wins.

“Tier-1 IT companies, except for HCL Tech, reported flat margins sequentially. HCLT’s margin was down 60bps QoQ due to the weakness in the Products business. For Tier-II firms, margin performance remained resilient despite supply-side challenges. We believe that margins are likely to remain stable in FY22 despite supplyside issues as strong revenue growth-led operating leverage, employee pyramid rationalization, higher offshoring and higher pricing should negate wage inflation,” Emkay’s note stated.

The views and recommendations made above are those of individual analysts or broking companies, and not of Mint.