Article

5 Information Technology (IT) Stocks to BUY

07 Aug 2019 Nikita Bhoota

The Indian IT sector is expected to perform well in the coming years on account of pick up in IT budgets and increasing adoption of digital technologies by the enterprises. Moreover, the depreciating rupee is an added advantage for the IT industry. The Indian rupee has recently touched a new low of ~Rs72.6 (source: Bloomberg) against dollar owing to factors like poor current account deficit numbers and surge in crude oil prices. International events such as better than expected US non-farm payroll data amid trade wars have strengthened the dollar.

Below mentioned are some IT stocks having good growth potential in the long run.

Cyient Ltd

Cyient is an established player in engineering design services, data transformation, network & operations and analytics. Its segment mix as on Q1FY19 included aerospace & defence ~34%, communication ~24% and utilities & geospatial (U&G) ~14%. Cyient is transitioning from a pure play service provider to an end-to-end solutions company (via strategic acquisitions) which will expand its addressable market. Moreover, third party vendors within ER&D space are projected to grow at faster rate (~14%) vs. traditional IT services (7-8%), which augurs well for Cyient. Design led manufacturing (DLM) business of Cyient turned profitable at operating level in FY18 and we expect gradual improvement in DLM margins going forward. We estimate 14.5% revenue and 15% PAT CAGR and EBITDA margin expansion of 66bps on better realisations and utilisations over FY18-20E. We expect an upside of 20% from CMP of Rs742 over a period of 12 months.

Year

Net Sales (Rscr)

OPM (%)

Adj Net Profit (Rs cr)

EPS (Rs)

PE (x)

FY18

3,918

17.5

424

37.7

19.7

FY19E

4,540

17.8

473

42.0

17.7

FY20E

5,134

18.2

561

49.8

14.9

Source: 5paisa research

Persistent Systems Ltd

PSL, a technology services company focuses on helping clients build and manage software driven businesses. Its business strategy is aligned around Digital (24% of revenues, Q4FY18), Alliance (24%), Services (46%), and Accelerite (6%). North America accounted for 81% of the revenues as on Q4FY18, while Europe, India and RoW accounted for 8%, 8% and 3% of revenues respectively. The company has a robust business model with multiple growth drivers such as Digital (EDT and IP), IBM Alliance (IoT), Services (OPD for ISVs) and Accelerite (own IPs). Its two-pronged strategy involves collaborating with ISVs and enhancing its digital products and capabilities. We expect USD revenue CAGR of ~12% over FY18‐20E driven by 29% revenue CAGR in the digital business. Growth will be supported by IoT Platform deal with IBM. Overall, we estimate revenue CAGR of 13.4% and EBITDA CAGR of 18.8% over FY18-20E aided by improving IP-led revenues. We project PAT CAGR of 18.7% over FY18-20E. We expect an upside of 13% from CMP of Rs842over a period of 12 months.

Year

Net Sales (Rscr)

OPM (%)

Net Profit (Rs cr)

EPS (Rs)

PE (x)

FY18

3,034

15.4

323

40.4

21.0

FY19E

3,455

16.3

383

47.9

17.7

FY20E

3,891

17.0

455

56.9

14.9

Source: 5paisa research

HCL Technologies Ltd

HCL Tech, India’s fourth largest IT company. HCLT is better placed among peers with sector leading revenue growth and stable margins. We expect company to post 12% revenue CAGR over FY18-20E owing to recovery in Infrastructure Management Services (IMS), higher rate of Engineering and R&D (ER&D) services outsourcing in India and strategy of investing in IP partnership which provide sticky revenues that would offset pressure in legacy IMS business. Margins would remain stable over FY18-20E on better execution and IP revenue contribution. We expect PAT CAGR of 7% over the same period. We expect an upside of 14% from CMP of Rs1,070over a period of 12 months.

Year

Net Sales (Rscr)

OPM (%)

Net Profit (Rs cr)

EPS (Rs)

PE (x)

FY18

50,570

22.6

8,780

63.2

16.9

FY19E

58,247

23.1

9,575

68.9

15.5

FY20E

63,740

22.3

10,088

72.6

14.7

Source: 5paisa research

L&T Infotech (LTI)

LTI is an Indian mid-cap IT company. We expect Larsen & Toubro Infoctech (LTI) to deliver revenue and PAT CAGR of 20% and 15% respectively over FY18-20E on the back of solid wins in recent past. Its Luxembourg-based Syncordis SA acquisition will help to expand its core banking implementation capability. Also, the company’s acquisition of AugmentIQ is expected to expand its high-end analytics offerings across industries. Post-acquisition, it will get access to MAXIQ, the big data platform developed by AugmentIQ. It also aims expansion in new markets of South Africa, Middle East and India. Moreover, LTI’s industry leading growth rates, on par valuations and impressive cash flow conversion make it an attractive bet. We expect an upside of 13% from CMP of Rs1,877over a period of 12 months.

Year

Net Sales (Rscr)

OPM (%)

Adj Net Profit (Rscr)

EPS (Rs)

PE (x)

FY18

7,306

16.2

1,161

67.5

27.8

FY19E

9,177

23.1

1,317

76.6

24.5

FY20E

1,057

28.0

1,554

90.3

20.8

Source: 5paisa research

Tech Mahindra

Tech Mahindra (Tech M) is India’s fifth largest IT company. TechM is well poised to capture the opportunity arising out of 5G roll outs in US after the lackluster growth in the telecom vertical (in past two years), which accounts for 43% of the company’s revenue. The order pipeline is likely to build up 2HFY19E onwards. Its LCC and Altiostar network acquisitions would differentiate its offerings and focus on IoT based platforms would drive telecom revenues. Its wide portfolio and design capabilities are aiding deal wins and fueling the growth in enterprise segment. TechM has sufficient margin levers in place viz. turnaround in portfolio companies (LCC turned EBITDA positive), higher offshoring and efforts to tighten operations. We expect top-line CAGR of 10% over FY18-20E. We see EBITDA CAGR of 19.8% in the same period. we expect PAT CAGR of 10% over FY18-20E. We expect an upside of 15% from CMP of Rs760over a period of 12 months.

Year

Net Sales (Rscr)

OPM (%)

Net Profit (Rs cr)

EPS (Rs)

PE (x)

FY18

30,773

15.3

3,800

43.0

17.7

FY19E

34,351

17.5

4,088

46.3

16.4

FY20E

37,334

18.1

4,624

52.3

14.5

Source: 5paisa research

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5 Information Technology (IT) Stocks to BUY

07 Aug 2019 Nikita Bhoota

The Indian IT sector is expected to perform well in the coming years on account of pick up in IT budgets and increasing adoption of digital technologies by the enterprises. Moreover, the depreciating rupee is an added advantage for the IT industry. The Indian rupee has recently touched a new low of ~Rs72.6 (source: Bloomberg) against dollar owing to factors like poor current account deficit numbers and surge in crude oil prices. International events such as better than expected US non-farm payroll data amid trade wars have strengthened the dollar.

Below mentioned are some IT stocks having good growth potential in the long run.

Cyient Ltd

Cyient is an established player in engineering design services, data transformation, network & operations and analytics. Its segment mix as on Q1FY19 included aerospace & defence ~34%, communication ~24% and utilities & geospatial (U&G) ~14%. Cyient is transitioning from a pure play service provider to an end-to-end solutions company (via strategic acquisitions) which will expand its addressable market. Moreover, third party vendors within ER&D space are projected to grow at faster rate (~14%) vs. traditional IT services (7-8%), which augurs well for Cyient. Design led manufacturing (DLM) business of Cyient turned profitable at operating level in FY18 and we expect gradual improvement in DLM margins going forward. We estimate 14.5% revenue and 15% PAT CAGR and EBITDA margin expansion of 66bps on better realisations and utilisations over FY18-20E. We expect an upside of 20% from CMP of Rs742 over a period of 12 months.

Year

Net Sales (Rscr)

OPM (%)

Adj Net Profit (Rs cr)

EPS (Rs)

PE (x)

FY18

3,918

17.5

424

37.7

19.7

FY19E

4,540

17.8

473

42.0

17.7

FY20E

5,134

18.2

561

49.8

14.9

Source: 5paisa research

Persistent Systems Ltd

PSL, a technology services company focuses on helping clients build and manage software driven businesses. Its business strategy is aligned around Digital (24% of revenues, Q4FY18), Alliance (24%), Services (46%), and Accelerite (6%). North America accounted for 81% of the revenues as on Q4FY18, while Europe, India and RoW accounted for 8%, 8% and 3% of revenues respectively. The company has a robust business model with multiple growth drivers such as Digital (EDT and IP), IBM Alliance (IoT), Services (OPD for ISVs) and Accelerite (own IPs). Its two-pronged strategy involves collaborating with ISVs and enhancing its digital products and capabilities. We expect USD revenue CAGR of ~12% over FY18‐20E driven by 29% revenue CAGR in the digital business. Growth will be supported by IoT Platform deal with IBM. Overall, we estimate revenue CAGR of 13.4% and EBITDA CAGR of 18.8% over FY18-20E aided by improving IP-led revenues. We project PAT CAGR of 18.7% over FY18-20E. We expect an upside of 13% from CMP of Rs842over a period of 12 months.

Year

Net Sales (Rscr)

OPM (%)

Net Profit (Rs cr)

EPS (Rs)

PE (x)

FY18

3,034

15.4

323

40.4

21.0

FY19E

3,455

16.3

383

47.9

17.7

FY20E

3,891

17.0

455

56.9

14.9

Source: 5paisa research

HCL Technologies Ltd

HCL Tech, India’s fourth largest IT company. HCLT is better placed among peers with sector leading revenue growth and stable margins. We expect company to post 12% revenue CAGR over FY18-20E owing to recovery in Infrastructure Management Services (IMS), higher rate of Engineering and R&D (ER&D) services outsourcing in India and strategy of investing in IP partnership which provide sticky revenues that would offset pressure in legacy IMS business. Margins would remain stable over FY18-20E on better execution and IP revenue contribution. We expect PAT CAGR of 7% over the same period. We expect an upside of 14% from CMP of Rs1,070over a period of 12 months.

Year

Net Sales (Rscr)

OPM (%)

Net Profit (Rs cr)

EPS (Rs)

PE (x)

FY18

50,570

22.6

8,780

63.2

16.9

FY19E

58,247

23.1

9,575

68.9

15.5

FY20E

63,740

22.3

10,088

72.6

14.7

Source: 5paisa research

L&T Infotech (LTI)

LTI is an Indian mid-cap IT company. We expect Larsen & Toubro Infoctech (LTI) to deliver revenue and PAT CAGR of 20% and 15% respectively over FY18-20E on the back of solid wins in recent past. Its Luxembourg-based Syncordis SA acquisition will help to expand its core banking implementation capability. Also, the company’s acquisition of AugmentIQ is expected to expand its high-end analytics offerings across industries. Post-acquisition, it will get access to MAXIQ, the big data platform developed by AugmentIQ. It also aims expansion in new markets of South Africa, Middle East and India. Moreover, LTI’s industry leading growth rates, on par valuations and impressive cash flow conversion make it an attractive bet. We expect an upside of 13% from CMP of Rs1,877over a period of 12 months.

Year

Net Sales (Rscr)

OPM (%)

Adj Net Profit (Rscr)

EPS (Rs)

PE (x)

FY18

7,306

16.2

1,161

67.5

27.8

FY19E

9,177

23.1

1,317

76.6

24.5

FY20E

1,057

28.0

1,554

90.3

20.8

Source: 5paisa research

Tech Mahindra

Tech Mahindra (Tech M) is India’s fifth largest IT company. TechM is well poised to capture the opportunity arising out of 5G roll outs in US after the lackluster growth in the telecom vertical (in past two years), which accounts for 43% of the company’s revenue. The order pipeline is likely to build up 2HFY19E onwards. Its LCC and Altiostar network acquisitions would differentiate its offerings and focus on IoT based platforms would drive telecom revenues. Its wide portfolio and design capabilities are aiding deal wins and fueling the growth in enterprise segment. TechM has sufficient margin levers in place viz. turnaround in portfolio companies (LCC turned EBITDA positive), higher offshoring and efforts to tighten operations. We expect top-line CAGR of 10% over FY18-20E. We see EBITDA CAGR of 19.8% in the same period. we expect PAT CAGR of 10% over FY18-20E. We expect an upside of 15% from CMP of Rs760over a period of 12 months.

Year

Net Sales (Rscr)

OPM (%)

Net Profit (Rs cr)

EPS (Rs)

PE (x)

FY18

30,773

15.3

3,800

43.0

17.7

FY19E

34,351

17.5

4,088

46.3

16.4

FY20E

37,334

18.1

4,624

52.3

14.5

Source: 5paisa research

Research Disclaimer