Stocks to buy: Tech Mahindra, Coforge, Birlasoft among top IT stock picks by Nomura ahead of Q4 results

The Indian IT services companies are expected to see muted revenue growth with a slight improvement in operating margins during the fourth quarter of FY24. In the absence of a firm recovery in discretionary demand, growth recovery in Q4FY24 and FY25 is estimated to be led primarily by cost-takeout projects. 

Foreign brokerage firm Nomura expects largecap IT companies to report revenue growth ranging from -1.6% to +1.5% on a quarter-on-quarter (QoQ) basis, and midcap IT companies to post growth ranging from +0.7% to +3.7% QoQ in constant currency (CC) terms. 

In largecaps, it expects Tata Consultancy Services (TCS) to report the strongest revenue growth of +1.5% QoQ in CC terms and expect Tech Mahindra to post the weakest growth of -1.6% QoQ in CC terms. In midcaps, it expects the strongest growth of +3.7% from L&T Technology Services (LTTS).

Read here: Q4 results preview: IT sector likely to report muted revenue growth with stable margins; all eyes on FY25 guidance

EBIT margins across most companies is estimated to have improved sequentially with the exception of HCL Technologies, LTIMindtree and eClerx Services, which may report some decline due to salary hikes, weak seasonality and investments.

Nomura remains cautious on the sector given limited visibility on a significant turnaround in discretionary demand for IT services. 

“We expect operating performance to vary significantly across companies in FY25F. Our FY25-26F EPS are 2-9% lower than the street across most of our coverage universe. We remain selective in our picks,” Nomura said.

Its top picks are Tech Mahindra among largecaps, and Coforge, Birlasoft and eClerx Services among midcaps. It maintains a ‘Reduce’ rating on TCS, Wipro, LTI Mindtree, Mphasis and LTTS.

Also Read: Stock Market: Half of Nifty 50 constituents, two-thirds of sectoral indices trade at premium valuation: Motilal Oswal

Here are top IT stocks to buy ahead of Q4 results:

Tech Mahindra | Buy | TP: ₹1,460

Tech Mahindra is expected to see a 1.6% revenue decline in CC terms during the March quarter led by a fall in both CMT and Enterprise verticals. Margins are likely to expand by 150 bps QoQ with a reversal in some one-off costs. Adjusted EBIT margin is likely to be flat at 7%, as per Nomura estimates.

It has a ‘Buy’ rating on Tech Mahindra shares with a target price of ₹1,460 apiece.

Coforge | Buy | TP: ₹7,300

Coforge Q4 revenue is expected to grow 1.8% in CC terms with EBIT margin expansion of 200 bps QoQ. Key things to watch out for in Coforge Q4 results should be commentary on demand and banking vertical, large deal wins and outlook on client CY24 discretionary spend.

Nomura has a ‘Buy’ call on the stock and a target price of ₹7,300 per share.

Also Read: Q4 results preview: FMCG sector likely to see muted revenue growth; margins to expand at a slower pace

Birlasoft | Buy | TP: ₹950

Nomura expects Birlasoft to report organic growth of 2.5% in CC terms sequentially and EBIT margin expansion of 70 bps QoQ with a full-year EBITDA margin of 16%.

It has a ‘Buy’ call on the stock with a TP of ₹950 per share.

eClerx Services | Buy | TP: ₹3,000

The brokerage firm has a ‘Buy’ rating on eClerx Services with a target price of ₹3,000 per share. It expects CC revenue growth of 0.7% and EBIT margin to contract 20 bps QoQ with investments in the team.

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Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before making any investment decisions.