Shares of information technology majors, including Infosys, TCS, HCL Tech, Wipro and Tech Mahindra, traded with gains on BSE on December 18 morning, boosted by an upbeat forecast by consulting and outsourcing services provider Accenture.
Accenture reported strong revenue growth, order bookings and raised guidance, underscoring the accelerated demand for technology transformation.
A Reuters report said the company has estimated the revenue growth for the fiscal year 2021 between 4 percent and 6 percent, above its previous estimate of 2-5 percent.
Accenture's forecast is considered a strong hint for the Indian IT companies. The positive forecast augurs well for these companies.
Global brokerage firm Credit Suisse said a pick up in Accenture’s revenue growth and strong bookings augured well for the demand environment.
"Infosys & HCL Tech are our preferred picks in the sector. We like Infosys on its industry-leading revenue growth and margin expansion potential. We are positive on HCL Tech due to its attractive valuation," Credit Suisse said.
Brokerage firm Motilal Oswal Financial Services sees Accenture's Q1FY21 earnings and management commentary as a reiteration of the adaptability and resilience of its business model.
"We continue to form a positive stand on Indian IT, led by positive trends on higher technology spending across global companies," Motilal Oswal said.
Prabhudas Lilladher said Accenture maintained its view of strong growth recovery in H2 of high single-digit with no impact of reimbursable travel costs.
"Accenture results reinforce our view of (i) accelerated demand for cloud adoption (ii) rising number of large transformation deals (iii) broad-based demand across all industry verticals," Prabhudas Lilladher said.
After the run-up in the last six months, the Indian IT sector valuation appears rich when compared to its long-term average.
However, Prabhudas Lilladher said the valuation had many aspects and it should be assessed on a broader parameter.
"In our view, valuations should not be looked at separately and should also factor in key aspects such as (1) sector has entered into technology upcycle, (2) valuations has a strong co-relation with sales and earnings growth, (3) prolonged low-interest rate environment, (4) digital becoming mainstream and (5) strong order book and deal pipeline," it said.
The valuations were reasonable and it was bullish on the Indian IT sector, the brokerage said.
"Our preference order in largecaps remains Infosys, HCL Tech and TCS and in Tier-2 Coforge, Larsen & Toubro Infotech, Mindtree and Mphasis," said Prabhudas Lilladher.
Taking a different view, ICICI Securities said the Nifty IT may underperform in FY 22.
"We see a high likelihood of Nifty IT underperformance over 2021. Recent Infosys’ commentary around reaching ‘just’ pre-COVID growth in FY22 (nearly 8-10 percent YoY, against expectations of strong acceleration) is a good starting point for the expectation reset," the brokerage said.
The current relative valuations of Indian IT against global tech would present a more compelling investment case in the latter, especially for FIIs, it said.
"We stay cautious and selective on the IT sector, preferring stocks with scope for idiosyncratic surprises and valuation comfort (Infosys, HCL Tech, Mphasis and Mindtree)."
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