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Small IT companies best top players in sequential revenue, margin growth

While the overall IT sector reported strong revenue growth in Q2FY22, tier-II companies outperformed their Tier-I peers in sequential revenue and margin expansion, Emkay Global said.

Margin expansion was aided by revenue growth-led operating leverage, offshore shift, and productivity improvement, which offset salary inflation and supply-side challenges.

Except for HCL, whose margins dropped, margins for other top tier IT companies remained flat QoQ. HCL’s margin was down 60 bps due to the lacklustre performance of the products business. Tier-II companies, on the contrary, emerged resilient despite supply-side challenges in terms of margin performance.

Analysts at Emkay Global noted in their report, “We roll forward target prices to Dec’23 and align our expectations of higher growth longevity for coverage companies. We upgrade TCS (TP: ₹4,100) and MPHL (TP: ₹3,730) to Buy, considering the recent stock underperformance. Our pecking order is INFO, TECHM, HCLT and TCS among Tier-1 names, and PSYS, FSOL, MPHL and BSOFT in mid-caps.”

MPHL stands for Mphasis, TCS for Tata Consultancy Services, INFO for Infosys, PSYS for Persistent Systems, BSOFT for Birlasoft. The Hindu BusinessLine

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