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Infosys vs TCS vs Wipro: Which stock is Nomura’s top IT sector pick?

Global brokerage firm Nomura is positive on select information technology (IT) majors from the largecaps and midcaps segment for 2023. The overseas firm said that IT sector valuation has moderated significantly and its premium to broader markets has fallen in the past six months. Among the sectoral indices on the BSE, the Information Technology index has cracked the most 20 per cent on a year-to-date basis till December 8, while the benchmark BSE Sensex has gained 7 per cent during the same period. Other sectors including BSE Healthcare, Consumer Durables and Realty also lost somewhere between 6 per cent and 11 per cent YTD.

Nomura thinks that there will be a divergence in the operating performance of domestic IT services companies in FY24. “Companies with a lower discretionary portfolio (consulting) and exposure to Europe are likely to fare better than the rest. We expect the weakest revenue growth for TCS and the strongest for Infosys in FY24 among large caps,” the brokerage said.

Shares of Infosys and Tata Consultancy Services have plunged 14 per cent and 10 per cent YTD. Going ahead, Nomura’s FY24 earnings projections are higher than consensus estimates for Infosys and lower for TCS and Wipro in the large caps space, and higher for Persistent Systems in the midcap space.

The brokerage has a ‘Buy’ rating on Infosys and Persistent Systems with a target price of Rs 1,900 and Rs 4,810. Shares of the former traded 2.84 per cent down at Rs 1,574 in the morning trade on December 9, while the latter was down 2.39 per cent at around Rs 4,002.

On the other hand, it has a ‘Reduce’ call on Tata Consultancy Services (Target price: Rs 2,850) and a ‘Neutral’ rating on Wipro (Rs 425). Shares of Wipro have plummeted 44 per cent YTD till December 8.

While sharing its views on margins, Nomura added that easing supply-side issues like softening of attrition are likely to lower the back-filling cost of employees. “Improving utilisation, as the recently-hired employees are trained and deployed, would be another tailwind. While the price increase is likely to remain positive, we think its pace is likely to slow down in the calendar year 2023 with more offshoring deals and higher pushback from enterprises given the easing labour market situation and falling currency. Overall, we expect an average EBIT margin improvement of 80 basis points in FY24 for the stocks under our coverage.” It sees the highest margin expansion of 130 basis points for Infosys among large caps and 160 basis points for Persistent in the mid-cap space.

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