IT stocks: ICICI Sec upgrades Coforge, Mphasis to 'Buy'; check rationale

IT stocks to buy: ICICI Securities has upgraded Coforge to 'BUY' from 'Hold'; Mphasis to 'Buy' from 'Add', based on their attractive valuation and healthy revenue growth visibility

IT stocks to buy: ICICI Securities has said that it prefers midcap IT stocks over largecaps because the formers are better placed to quickly remodel their business as AI begins to reshape the industry. 

In a report on India's technology sector, ICICI Securities said that the IT services sector is entering a 'value zone' after a sharp correction, even though AI-led headwinds continue to cloud the near-term growth outlook.

The brokerage has cut target multiples for IT services under coverage by about 20 per cent, aligning with pre-Covid averages amid AI-fueled growth concerns. Despite these concerns, ICICI Securities upgraded its stance on the sector to 'Neutral'.  READ INDIAN STOCK MARKET UPDATES LIVE

 

Coforge, Mphasis preferred picks

From the midcap space, ICICI Securities has upgraded Coforge to 'BUY' from 'Hold'; Mphasis to 'Buy' from 'Add', based on their attractive valuation and healthy revenue growth visibility. The brokerage has set a target price of ₹1,430 on Coforge and ₹2,500 on Mphasis.

Meanwhile, Coforge shares traded 1.5 per cent lower at ₹1,064 on Wednesday around 11AM. The target price implies an upside of nearly 35 per cent from the CMP. On the other hand, Mphasis shares were trading flat at ₹2,082, and the target offers an upside of 20 per cent.

The brokerage has also upgraded LTM to 'HOLD' from 'Reduce' on a sharp correction in the stock price, for a target of ₹4,490.

Other than Coforge, Mphasis, and LTM, ICICI Securities retained 'Buy' rating on Hexaware and LatentView for targets of ₹580 and ₹440, respectively.

Notably, the Nifty IT index is now trading at 15.4x (two-year forward earnings), at par with Nifty 50 versus its long-term average premium of 17 per cent.

The report said that multiple structural challenges, including AI-led deflation, a shift in incremental enterprise spend towards AI tools and infrastructure, and a slower-than-expected pace of enterprise-wide AI adoption, are expected to weigh on revenue growth over FY27–FY28. The brokerage has, accordingly, trimmed its revenue growth forecasts. However, it sees limited downside risk to earnings, supported by rupee depreciation.

The brokerage expects the industry to deliver subdued revenue growth of 3–6 per cent Y-o-Y CC for FY27E, better than FY26 but still lower than the long-term average of 7–8 per cent.  READ | Steel stocks in focus: SAIL, Tata Steel, JSW, Jindal Steel rally up to 4%

IT services sector: Three scenarios

Base case: In the base case, the brokerage expects the IT services industry to grow in the range of 3 5o 5 per cent Y-o-Y US as against the long-term average of 7-8 per cent, factoring in prolonged subdued growth.

Bull case: In the bull case, the brokerage expects earnings growth to be at 9–10 per cent by FY28E, factoring in an average 20 per cent valuation re-rating as multiples return to pre-correction (FY25) levels. The recovery will be driven by a higher share of incremental technology spend through high-value AI engagements.

Bear case: In the bear case, the brokerage assumes further compression in the revenue growth rate to 1–2 per cent for the sector due to intensified AI-led deflation.    ======================

Disclaimer: View and outlook shared belong to the respective brokerages/analysts and are not endorsed by Business Standard. Readers' discretion is advised.