TCS, Infosys shares trade near 52-week lows. Good levels to buy the IT stocks?
Premium- Both TCS and Infosys should be able to sustain margins going forward, believes Motilal Oswal
Shares of top Indian IT companies Tata Consultancy Services (TCS) and Infosys have fallen sharply amid the current market volatility and the IT stocks are trading near their respective 52-week low levels. TCS shares are down about 18% in 2022 so far whereas that of Infosys have fallen more than 25% during the same period.
Domestic brokerage and research firm Motilal Oswal is bullish on the IT stocks and has Buy tags on both TCS and Infosys shares with a target price of ₹4,240 and ₹2,000 apiece respectively.
“TCS maintains its long-term aspirational margin band at 26-28% as it does not see any change in its long-term cost structure or relative competitiveness. Higher-quality revenue is aiding margin resilience in TCS," the note stated.
Meanwhile, Infosys delivered a margin of 23% on the back of strong growth, despite margin pressures in FY22. With attrition moderating, an improvement in pricing, lower dependency on sub-contractors, higher fresher additions, and strong operating leverage, both companies should be able to sustain margins going forward, as per the brokerage. With rising demand, attracting talent, training, and retention gained paramount importance, both TCS and Infosys hired in record numbers in FY22.
"Balance sheets for both IT companies remains strong and liquid (with cash at 21-34% of assets and ~4% of market capitalization). Sub-optimal assets like goodwill/intangibles remained low for TCS and Infosys. Further, RoE of TCS (~44%) and Infosys (~29%) remained the best across the industry. Both companies also reported strong payouts in FY22 (TCS/INFO – 97%/75%)," Motilal Oswal highlighted.
Given the capabilities of TCS and Infosys, both companies are in good position to withstand a weakening macro environment. Margin should remain stable, despite the headwinds, on account of moderation in attrition, strong fresher addition, and a positive pricing environment, it added.
The brokerage remains positive on the IT Services sector on reasonable valuations and good double-digit earnings growth (partially aided by a 300-350 bp impact from the depreciation in the INR v/s the USD) in FY23.
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The views and recommendations made above are those of individual analysts or broking companies, and not of Mint.