Morgan Stanley has revised its price targets for most IT giants upwards including TCS, Infosys and HCL Tech while maintaining largely favourable ratings.
The brokerage firm cited expectations of robust FY25 revenue growth, margin improvement and double-digit EPS growth for raising the target.
Morgan Stanley attributed the optimistic revenue growth forecasts for FY25 to stabilising macro risks, the leveling off of hyper-scale revenue growth, an anticipated rebound in BFSI (banking, financial services and insurance) spending in CY24, announcements of significant deal wins and robust order bookings in the second quarter of FY24.
The brokerage has increased the target of IT shares by 11 per cent to 29 per cent.
As per the outlook, the EBIT margin is expected to improve from Q1 FY25 levels.
Morgan Stanley says that the large deal that the companies are signing will support growth.
Morgan Stanley says valuations of the companies will remain sustainable.
Maintains “overweight”: TCS, Infosys, HCL Tech, LTI Mindtree
Maintains “equal weight”: Mphasis
Maintains “underweight”: Wipro, L&T Tech, Tata Elxsi
It has upgraded from “equal weight” to “overweight” Cyient because of EPS upgrades driven by strong margins and modest expectations for revenue growth.
It had downgraded from “equal weight” to “underweight” Tech Mahindra, saying the period of strong outperformance has ended and over concerns about potential downward pressure on EPS.
“We have revised our price targets up by 11-29 per cent, led by roll forward, lower probability of bear case, and higher probability of bull case, and increased long-term earnings. We have raised our margin assumptions for ER&D names, while our revenue growth assumptions remain largely unchanged, except for Wipro and Mphasis (numbers lowered),” the firm said in a note.
Industry View & Order of Preference
While we are getting more constructive on growth, we still maintain an In-Line view on industry, as: a) the sector has become relatively more expensive in the last few months – the premium to Sensex has increased; and b) we still don’t see consensus raising F24/F25 EPS assumptions. Due to this we have been selective on our stock picks and maintain our OW rating on HCLT, LTIM and Infosys within large caps. We upgrade Cyient (within ER&D services) to OW, owing to increased
earnings and higher multiples with the revenue growth cycle remaining strong, the report stated.
“We maintain UW on Wipro (low valuation but low confidence on revenue growth gap narrowing vs peers) and downgrade Tech M to UW (strong rally despite cut in earnings making valuation more expensive, low confidence on growth revival in Telecom vertical and potential turnaround, due to management changes well in the price). We maintain EW on TCS and MphasiS on valuations, despite strong order book and growth bottoming out on QoQ basis. Within ER&D Services, we maintain UW on Tata Elxsi (growth likely to be sub-optimal and high valuations) and LTTS (low confidence on organic revenue growth guidance of 10% yoy in FY24 improving and strong recent outperformance),” the report said.
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