Despite Expected Headwinds, BNP Paribas Is Bullish On The Indian IT Sector
BNP Paribas has maintained a buy rating for most names in its IT services coverage despite expected headwinds to revenue.
The large-cap Indian IT stocks are expected to do well in 2023, said BNP Paribas in its outlook for the sector, released on Thursday. The agency listed large deal wins, favorable Fed policy, and resilient tech spending by large global enterprises as potential catalysts to its bullish call on the sector.
The brokerage has maintained a buy rating for most names in its IT services coverage despite expected headwinds to revenues on account of mounting economic troubles in the U.S. and Europe.
In the sectoral outlook report, the agency has awarded ‘buy’ rating to Infosys, Tata Consultancy Services, HCL Technologies, Redington, Tech Mahindra, and Mphasis. It initiated coverage on LTIMindtree, which came into existence recently after the merger of L&T Infotech and Mindtree, with a buy rating. Wipro and Persistent Systems have been given ‘reduce’ rating.
“Our top picks are TCS and Infosys for their digital capabilities and execution track records,” wrote BNP Paribas analyst Kumar Rakesh in the report.
BNP Paribas projections have given a target price of Rs 3,765 for TCS and Rs 1,760 for Infosys, up 2.5% and 4.5% from its previous estimates.
As per Bloomberg data, 23 of 50 analysts have given a 'buy' rating to TCS, while 16 have a 'hold' rating for the scrip, and 11 analysts have a 'sell' rating on the stock. The target price of the TCS stock over the next 12 months is Rs 3,448.
For Infosys, 42 of 49 analysts have a 'buy' rating, five have a 'hold' and two have a 'sell' rating. The 12-month target price for the stock is Rs 1,724.98.
“Post Mindtree’s merger with L&T Infotech, we introduce our estimates and target price for the merged entity, LTIMindtree (not comparable to our previous estimates that were only for Mindtree), with a buy rating. We see LTIMindtree benefiting from revenue and cost synergies,” he added.
LTIMindtree has a 'buy' rating from 19 analysts, a 'hold' rating from nine, and a 'sell' rating from 20 analysts, according to Bloomberg. BNP Paribas has pegged a target price of Rs 4,975 for the LTIMindtree stock, while Bloomberg's recommendations stand at Rs 4,913.33.
Macro Troubles, Demand Moderation Can Play Spoilsport
Despite its positive outlook on the sector, BNP Paribas flagged a sharper-than-expected decline in global economic activity and GDP growth as a potential risk to its outlook for the IT sector.
The inability to fully offset current cost inflation through aggressive new hiring, further rupee depreciation, price hikes, and moderation in demand for IT services leading to a higher-than-expected hit on margins are other risks the agency mentioned in its outlook.
“We see in-line results, and reassuring management commentary may not be enough to revive investor interest yet. However, another quarter without any earnings estimate downgrades should be key to start looking at the sector favourably,” the report said.