IT stocks to buy: Check fresh targets on TechM, Mphasis, Sagility as AI fear ease, hiring picks up -

The NSE IT index rallied about 12 per cent over the past month and outperformed the Nifty by around 13 per cent, mirroring its first-quarter performance, as September-quarter results were in line with or slightly above expectations and concerns over artificial intelligence-led disruption eased, JM Financial said.

However, the brokerage said macroeconomic uncertainty, AI-led productivity in deal negotiations and intense competition remain concerns after four consecutive years of subdued IT services growth. It expects large-tier companies' constant-currency revenue growth to improve gradually to about 4 per cent in FY28 from around 3 per cent in FY27, but remains selective because a sustained demand recovery has yet to emerge.

Demand outlook Investors believe incremental demand improved for most companies in the second quarter. TCS' international business recorded 1.2 per cent sequential constant-currency growth, against flat growth in the first quarter. HCL Technologies was positive about September demand after performing better than expected, while Wipro expressed optimism about its fourth-quarter outlook.

Infosys Ltd, however, remained cautious because of softer volumes, the absence of realisation benefits and greater competitive intensity. JM Financial said softer volumes and competition appeared to be industry-wide issues rather than specific to Infosys. It also flagged the potential effects of the rupee's roughly 0.7 per cent appreciation from average second-quarter rates, pressure on growth and pricing from competition, and possible margin pressure from large deals promising AI-led productivity gains.

Hiring and valuations Most companies reported net headcount additions during the quarter and continued hiring freshers. The brokerage expects fresher recruitment to continue as companies optimise their employee pyramids. While net additions provide managements with some revenue visibility, whether they translate into higher utilisation and growth remains to be monitored.

Large-tier IT stocks have outperformed mid-tier companies by about 7 per cent since early October, largely because of the anti-AI trade. Consequently, the valuation premium of mid-tier companies over large-tier firms has narrowed from about 78 per cent to 65 per cent, but remains above the five-year average of 36 per cent. JM Financial said the gap could persist unless demand improves meaningfully and investors shift their focus back to earnings visibility.

Outlook Tech Mahindra Ltd trades at about 23 times one-year forward consensus earnings per share, a 40 per cent premium to the large-tier group. JM Financial said meaningful absolute upside could remain limited unless visibility on FY28 growth improves.

Although FY27 growth benefited from the ramp-up of two large deals, quarterly total contract value of about $1 billion and 35 per cent year-on-year growth over the last 12 months provide comfort on the FY28 outlook. Its valuation must also be viewed against Coforge's multiple of about 29 times and its projected low-to-mid-teens FY28 growth.

Consensus FY27 EBIT estimates for large-tier firms were cut by 0.3 per cent in June before the first-quarter results and by another 0.2 per cent in September before the second-quarter results, partly offset by rupee depreciation. This indicated broadly in-line or slightly better quarters after expectations had already been lowered.

The NSE IT index trades at 18.1 times one-year forward consensus earnings, against its five-year average of 24 times and pre-pandemic five-year average of 17 times. JM Financial prefers Tech Mahindra with an 'Add' rating (Target Price Rs 1,800) among large-tier firms, Mphasis with a 'buy' rating (Target Price Rs 2,645) among mid-tier companies, and Sagility (Target Price Rs 56) and Firstsource (Target Price Rs 310), both rated 'buy', among BPO companies.