Why brokerages are bullish on IT stocks going ahead? Check details here

"Indian IT services growth would continue to outpace the global market and other key geographies materially," said Prabhudas Lilladher

India's Information Technology (IT) sector has been the talk of the Street since the US Federal Reserve hinted at a rate cut in September. Taking a bullish stance on the Indian IT Services sector, brokerage firm Prabhudas Lilladher, said, "Indian IT services growth would continue to outpace the global market and other key geographies materially."

The brokerage expects the IT services sector in the country to report a Compound annual growth rate (CAGR) of 10 per cent over CY23-28E. It remains positive on the broader theme of IT services outsourcing expenditure by global enterprises for modernising or transforming their operations.

Although businesses have pushed savings-led transformation deals in recent times, compared to how these deals were cost-focused earlier, the brokerage firm believes that any improvement in the macro environment is likely to boost sentiment and help resume long-deferred discretionary programs by late FY25 or early FY26.

Furthermore, even though the mid-cap IT firms saw notable volatility in their operating performance, the outlook for these companies remains strong for the rest of FY25, the research note from Prabhudas Lilladher noted.

"We believe, as the macro recovery gathers pace and spending sentiment improves, mid-/small-cap IT outsourcing providers continue to benefit through the niche and deep expertise developed within key verticals along with execution agility and flexibility, participation in vendor consolidation, and winning disproportionately over large caps," the report stated.

As per analysts, enterprise deal sizes have become fragmented, which has led to more benefits for mid-cap IT companies as compared to one-shot, large mega deals that were being cornered by single, large vendors. This is also being done by the clients to de-risk their vendor dependency, the analysts noted.  

In that backdrop, the brokerage firm Prabhudas Lilladher has initiated coverage on Cyient, Persistent Systems and Mphasis. It gave an 'Accumulate' rating on Cyient, and pegged its target price at Rs 2,130.

That apart, the brokerage initiated coverage on Mphasis with a 'Hold' rating and a target price of Rs 2,920 per share, while the rating on Persistent Systems was 'Accumulate', and the target price was estimated at Rs 5,320 per share.

Meanwhile, InCred Equities, in a research note, stated that this is not the time to be underweight on the IT sector. "We believe constructive messaging of 1QFY25 earnings may continue in Q2FY25F as well, led by improving growth trajectory and visibility," its research report noted.

The brokerage firm further noted that tier I Indian IT services vendors are likely winning a larger share of the current demand, given thier broader offerings and deal structuring flexibility, while tier II vendors are partnering with mid-sized global consulting firms to participate in such opportunities.

The brokerage firm added that it continues to remain selective, and prefers restructuring stories, while highlighting Tech Mahindra as its stock pick.