Infosys, HCLT and Tech Mahindra are Kotak’s top IT stocks after 2QFY20

Information technology companies Infosys, HCL Technologies and Tech Mahindra have emerged as the top-performing companies in the IT sector at the end of the second quarter of the financial year 2020.

Strong free cash generation by Infosys and no material change in its working capital cycle have stolen the thunder off allegations of improper accounting of costs and revenues, said a research report from Kotak Institutional Equities.

Tech Mahindra has strong catalysts in the form of revival in growth in telecom, 5G opportunities and mega-deal momentum, whereas in HCLT, the products strategy may not be the best use of capital but inexpensive valuations and strong organic growth present a strong case, the report said.

India’s tier 1 IT companies, barring Tata Consultancy Services (TCS), largely met revenue growth expectations. TCS missed Kotak’s estimates due to weak performance of the retail segment alongside an expected slowdown in financial services and pockets of manufacturing.

In another notable comment on the IT services industry, the report recommended that large deal momentum would be crucial to sustain growth in successive quarters.

“We believe that overall spending has pockets of softness, especially in financial services in Europe, capital markets in the US and the retail vertical,” the report said, and added large deal momentum is critical to offset these headwinds.

The report found Tech Mahindra exceedingly well-positioned with low exposure to troubled clients and “strong mega-deal momentum.”

Kotak also recognised a strong headcount addition in tier 1 IT companies this quarter, but now expects “meaningful” reduction in net hiring in the next few quarters due to pyramid rationalisation initiatives of a few companies.