LTIMindtree, Infosys, TCS Get A New 'Buy' Rating As Goldman Sees IT Revival In FY25

A revival in India’s $245-billion IT sector is only a matter of time as the services outsourcing is essential spending, not discretionary, according to Goldman Sachs.

While revenue growth in the IT sector is likely to stay muted at 4% year-on-year in FY24, the market is under appreciating the recovery and upside from FY25, according to a Goldman Sachs report released on Wednesday. This growth, it said, will be aided by pent-up demand and initial tailwinds from Generative AI. 

 “We forecast a 9-10% annual revenue growth for our India IT coverage from FY25, which is two times that of Goldman Sachs’ covered global companies in 2024,” Manish Adukia, Mansi Mittal and Harshita Wadher, analysts at the US-based brokerage, wrote in the research report. “While our overall sector revenue growth is in line with consensus, we see company-specific divergence and are ahead of consensus on TCS and Infosys.”

The sector’s operational profitability—measured as earnings before interest and tax or EBIT—is likely to trend higher into double digits due to multiple margin levers in play. That makes the sector a lucrative investment bet, despite premium valuations.

“While India IT is trading at premium valuations versus its last ten-year average, we argue that the higher multiples are warranted as we view growth in IT/Tech spends as an industry perennial with a lower susceptibility to disruptions,” Goldman Sachs said.

Against that backdrop, Goldman Sachs initiated coverage of six Indian IT stocks.

• LTIMindtree (Rating: Buy; 12M Target Price: Rs 6,310): It shows the fastest growth in Goldman Sachs’ IT coverage, driven by cross-selling to existing accounts, and the higher margin expansion potential due to merger synergies.

• Infosys (Rating: Buy; 12M Target Price: Rs 1,600): Even as Goldman Sachs expects two more quarters of subdued revenue growth, a strong order book indicates sharp revenue recovery in 2024, which current valuations do not reflect. The brokerage is 2%/4% ahead of consensus on FY25/FY26 revenues/EBIT.

• TCS (Rating: Buy; 12M Target Price: Rs 3,930): Goldman Sachs sees the company as a defensive play in a tough demand environment, and expects TCS to be a beneficiary of vendor consolidation, given its in-depth vertical expertise, and wider geographical/portfolio presence. The brokerage is 1%/2% ahead of consensus on FY26 revenues/EBIT.

• Tech Mahindra (Rating: Sell; 12M Target Price: Rs 1,010): Goldman Sachs is up to 5% below vs consensus on EBIT due to its challenged growth outlook due to high exposure to telecom and weaker margin profile not reflected in valuations.

• Wipro (Rating: Sell; 12M Target Price: Rs 385): The company has the weakest growth profile among peers and a challenged margin profile. 

• HCL Technologies (Rating: Neutral; 12M Target Price: Rs 1,160): Goldman Sachs’ analysis suggests balanced risk-reward as there are risks to near-term revenue growth, but the company is seen well-positioned from FY25.