Nomura remains bullish on these three Indian IT stocks as Accenture earnings underscore robust demand

The strong demand environment is the key read-through from the strong Q2FY22 results for the India IT services sector.

In terms of constant currency, the Ireland-based multinational information technology services company recorded a 28 percent year-on-year growth in revenues for the quarter ended February. The growth in dollar terms was 24 percent.

The reported revenues were higher than the guidance band. The company's financial year begins in March and ends in February.

In constant currency terms, consulting and outsourcing grew 34 percent and 23 percent, respectively, year-on-year.

The second-quarter financial performance demonstrates continued strong broad-based demand across all our markets, services and industries.

Net income for the second quarter was up from last year.

The IT major has raised its full-year FY22 revenue growth to 24-26 percent in local currency. It now expects the operating margin to be 15.2 percent, an expansion of 10 basis points from fiscal 2021, against earlier expectations of 10-30 basis points expansion in margin.

The entire increase in guidance is organic, according to Nomura.

In the third quarter, the company expects revenues to be in the range of $15.70-16.15 billion, an increase of 22-26 percent in constant currency.

The third quarter and full year business outlook does not include assumptions for a significant escalation or expansion of economic disruption or the conflict's current scope, which could have a material adverse effect on the company's results of operations.

The company feels that the invasion of Ukraine by Russia has increased the level of economic and political uncertainty.

In a recent note, Nomura said that a war in the eurozone could lead to India IT companies sounding caution in their FY23 outlook and guidance.

IT stocks had seen a correction before the recent recovery. The Nifty IT index has gained 10 percent since it fell 18 percent in January.

The new bookings for the second quarter were a record $19.6 billion, an increase of 26 percent in constant currency over the corresponding quarter last year as the demand is strong.

Some of the effects of price increases in Q2FY22 have begun to be seen, and the company expects further increases in the coming quarters.

The demand outlook for India IT services is positive because of the demand for transformational services and cloud adoption, according to the analyst.

The industry growth rate is expected to be around 1.5x of pre-pandemic levels due to cloud adoption.

In largecaps, the top picks are Infosys and Wipro, and in midcaps, the top pick is Persistent Systems.

There is a buy rating on Wipro with a target of Rs 850, implying 41 percent potential upside, a buy rating on Infosys with a price target of Rs 2,440, implying 31 percent potential upside from current levels, and a buy on Persistent with a target price of Rs 5,330

The attrition rate for India IT companies is likely to stay high for the next few quarters.