IT stocks have been on a roll this year amid improved prospects of Indian IT companies. The Nifty IT index has been an outperformer this year with nearly 40% return with select largecap and midcap stocks leading the rally. Morgan Stanley in a recent report on IT midcaps said that it expects the revenue beat-and-raise cycle to continue for select midcap stocks like Mindtree and Mphasis, allowing them to close the valuation gap with larger peers.
As its preferred midcap pick, Morgan Stanley expects Mindtree to continue to surprise positively on revenues in coming quarters, led by strong traction at top client (adding adjacencies to existing services), recovery in the travel vertical and a healthy deal pipeline with larger tenures providing visibility into FY23 growth as well.
Moreover, with investments likely abating post FY22 and as revenues ramp up in FY23 from these verticals, Morgan Stanley expects to see margin tailwinds in F23 and higher EPS upside in Mindtree.
The brokerage firm is overweight on Mindtree with a target price of ₹3,450 per share. Similarly, it is also overweight on Mphasis shares and has a target price of ₹3,150 per share. Mindtree and Mphasis share prices have witnessed a decent uptick this year. Shares of Mindtree have gained 93% this year whereas that of Mphasis has surged 85% in 2021(year-to-date).
Morgan Stanley said that it has upgraded MphasiS to Overweight despite the recent outperformance as DXC-related headwinds are becoming less relevant, and could see positive surprises as the company gains share in key accounts. It also expects resilience in margins despite supply side challenges as the company has already created a bench. “We expect both stocks to reduce their valuation gap with TCS and Infosys over coming quarters, driving upside from current levels,” Morgan Stanley said in the note.