The Indian IT space has been a star performer as the coronavirus outbreak has accelerated the pace of digitisation and increased our dependence on technology.
Barring a few, IT heavyweights reported healthy quarterly earnings in FY21. Brokerage firm HDFC Securities pointed out that over the past year, the IT index’s re-rating (16 times to 23 times) and performance has been supported by the increase in consensus earnings estimate of 20 and 30 percent for tier-1 and mid-tier companies.
"FY21 closed with low single-digit revenue growth, 8/20 percent profit growth (tier- 1/mid-tier), and an astounding 35/55 percent growth in OCF/FCF (operating cash flow/free cash flow)," HDFC Securities said.
"Following 10 percent earnings growth in FY21, we expect the sector to deliver 15 percent CAGR as revenue accelerates to 15 percent in FY22E and then normalises to 11 percent in FY23E," said the brokerage.
HDFC Securities has downgraded Tata Elxsi and Persistent to "add" from "buy" and remains constructive on the sector. Its preferred picks include Infosys, HCL Tech, Mphasis, LTI and Sonata.
Brokerage firm Prabhudas Lilladher said Tier-1 IT services’ revenue growth in Q4FY21 was a tad lower at 3.7 percent QoQ USD as compared to the previous two quarters.
"Three out of five tier-1 IT companies reported a miss on revenue estimates. However, we still continue to be confident of the strong demand environment and the miss is only due to moderation of revenue growth post 2 quarters of strong growth," said Prabhudas Lilladher.
Revenue growth was led by a strong demand momentum in BFSI and sustained recovery in the manufacturing and retail sectors. The communications vertical was weak for all companies.
"Management commentary across board indicated record-high deal pipeline and broad-based demand environment characterized by (1) cost take-out and transformation led outsourcing or lift-shift-transform deals and (2) digital and cloud adoption led deals," Prabhudas Lilladher pointed out.
Consecutive quarters of record hiring (freshers) also indicate strong optimism in demand. Strong hiring trend will continue in FY22, the brokerage firm said.
Prabhudas Lilladher is positive on the Indian IT sector and believes it will continue to trade at higher multiples well supported by improving visibility (strong deal wins, faster ramp-up), sustained margins, improving FCF and improving demand environment across verticals.
"TCS, Infosys are our top picks. We believe that TCS has the ability to gain market share while managing supply-side pressures. We are also impressed by a turnaround in Wipro. In midcap our pecking order is MTCL, Coforge, LTI, Mphasis & LTTS-Cyient in ER&D space," said Prabhudas Lilladher.
The second wave of COVID-19 has triggered some supply-side disruptions for IT companies. The firms are, however, managing these pressures through cross-skilling under-utilised talent and diversifying delivery to nearshore and offshore centres outside India, said Prabhudas Lilladher.
The brokerage firm believes that headwinds of the supply-side can be partially offset by levers such as pyramid optimisation, increase in offshoring, controlling attrition and leveraging revenue growth.Disclaimer: The views and investment tips expressed by experts on Moneycontrol.com are their own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.