Infosys, TCS and Cyient are Kotak's top IT stock picks. Here's why

Infosys Ltd, Tata Consultancy Services Ltd (TCS) and Cyient Ltd are Kotak Institutional Equities' top IT sector picks. Kotak said it likes IT firms that cater to both discretionary spending and cost take-outs. It likes IT firms with consistent execution and whose valuations are not in expensive territory.

"Infosys continues to be our top pick, followed by TCS. TCS should lead growth in FY2025E, followed by HCL Technologies. Infosys should underperform on growth among the three in FY2025E, given its higher discretionary exposure. We expect a recovery in growth rates in FY2026 as discretionary spending likely improves," it said.

Kotak though noted that the March is a seasonally weak quarter for Infosys. This year will be no different, it said. Cyient is its key pick in the ERD space.

Kotak took into account the still muted discretionary spending and moderation in new large deal wins for most Indian IT players in the past two quarters and trimmed revenue growth estimates for FY2025-26. Further, it cut the pace of margin increase for select companies.

The result is a 0-1 per cent fair value cut for most companies under its coverage. Kotak expects select companies with a higher exposure to discretionary spending and higher exposure to the impacted segments—BFSI, telecom and retail/CPG/logistics, especially in the North America region—to underperform on relative growth.

"We expect the margin trajectory to improve across companies in FY2025E, although a lack of rupee depreciation will constrain the pace; Infosys, TCS and Cyient continue to be our top picks," it said.

Kotak has cut FY2024-26E dollar revenue estimates across IT services companies by 0-3 per cent and EBIT margins by 10-50 bps for select companies, leading to a 1-4 oer cent EPS cut. Weak discretionary spending, a lack of credible recovery signs in the higher impacted segments and a moderation in deal wins in the last two quarters necessitate the cut, it said.

"The cuts are higher for companies with a higher exposure to discretionary spending and impacted vertical/geos—Wipro, Infosys, Tech Mahindra and LTIMindtree. We roll over fair values to March 2026. EPS cuts and rollover lead to a Fair Value increase for TCS and Persistent and a decline of 0-1 per cent for others," Kotak said.

The domestic brokerage has cut its fair value multiple of LTIMindtree to 24 times from 25 times earlier, taking into account the weak growth outlook and persisting integration risks. It expected a slower pace of margin improvement in the near term and cut Tech Mahindra’s FY2025-26E EBIT margins by 130-140 bps, leading to a 12-14 per cent EPS cut.

"Our longer-term estimates have not materially changed. We cut Fair Value by 5 per cent to Rs 1,260 (from Rs 1,330), valuing the stock at 19 times (18 times earlier) March 2026E EPS," it said.

Kotak expects rupee depreciation of just 0.8 per cent in FY2025E compared to 2.8 per cent in FY2024E and 8.1 per cent in FY2023. It has cut margin expansion expectations for select companies such as TechM, LTIM and Persistent, taking into account the investments made to facilitate growth in both technical resources and SG&A and the competitive bidding scenario in large deals. Ut largely kept margin estimates intact for other companies.