Domestic Brokerage house Motilal Oswal expects the banks to maintain caution and curtail discretionary technology spending until the situation stabilises. This would hit IT spends in the early part of FY24 and exert further pressure on near-term growth outlook for IT services.

However, the brokerage expects the peak of weak macro impact to play out by 1HFY24 before recovering gradually in 2HFY24. With structural demand remaining intact, Motilal Oswal continues to expect a strong demand recovery in FY25.

“We have cut our FY24E/FY25E EPS for tier-1 players by 0.4-3.9 per cent/0.8-3.7 per Cent due to their near-term weaknesses,” the note said.

Tier-1 vs tier-2 players

Considering the scale of offerings, top-notch client profile and execution prowess, the brokerage believes that tier-1 companies are better placed in a weakening demand environment.

Normalisation in hiring, higher fresher additions, lower attrition, improvement in utilisation and lesser reliance on sub-contractor expenses should drive margin expansion over the medium term, it said.

TCS remains its top stock pick, followed by HCLTech, and Infosys in the tier-1 IT space.

TCS: The adverse impact of IT-related spending cuts should primarily be on discretionary spends, which have been the key spending area post Covid-induced disruptions. On the other hand, cost optimisation and vendor consolidation-related spends should remain the prime focus over the next 3-4 quarters, which Motilal Oswal sees as positive for TCS – it’s top pick in CY23.

Infosys: Domestic brokerage firm ICICI Securities continues to value Infosys at 23 times FY26E EPS of ₹86 (discounted back 1-year with WACC of 12 per cent) to arrive at the brokerage’s 12-month target price of ₹1,759 from ₹1,772 earlier, implying 28 per cent potential upside.

The stock has corrected 7 per cent in the last one month and is trading at an attractive valuation of 19 times/16 times on FY25/26 EPS, the brokerage said.

The brokerage has upgraded Infosys to ‘Buy’ on attractive valuations, and it expects Infosys to be the fastest growing large-cap IT services company globally.

Wipro: ICICI Securities has reduced Wipro’s target multiple to 14 times from 16 times earlier on weaker growth outlook in BFSI vertical (35 per cent of revenue) given majority of revenue growth in the past has come from BFSI and retail verticals.

The brokerage has a ‘Hold’ call on Wipro. “We value Wipro at 14 times FY26E EPS of ₹28 (discounted back 1-year with WACC of 12 per cent) to arrive at our 12-month target price of ₹355 from ₹410 earlier),” it said.

IT stocks to buy, sell, hold as recommended by brokerages –

TCS (Buy)

Infosys (Buy)

Wipro (Hold/Neutral)

HCL Tech (Buy)

Tech Mahindra (Neutral)

LTIMindtree (Neutral)

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