IT majors beat Street estimates in Q3, how should you play the sector?

The numbers of these large-cap IT players came on the better side of expectations and the outlook for the sector looks positive.

January 20, 2021 / 01:09 PM IST
 
 
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IT majors - TCS, Infosys, HCL Technologies and Wipro - have announced their December quarter earnings. As per analysts, the numbers were ahead of estimates on most parameters.

Brokerages mostly retained their ratings on the stocks but some of them have raised target prices on these IT stocks, indicating that these stocks have more steam left.

CLSA maintained 'outperform' call on TCS and raised the target to Rs 3,200 from Rs 3,070. It reiterated a 'buy' call on Infosys and raised the target price to Rs 1,620 from Rs 1,480.

CLSA maintained a 'buy' rating on HCL Tech and raise the target price to Rs 1,180 from Rs 1,120 and increase FY22/23 EPS estimates by 3 percent.

Credit Suisse maintained a 'neutral' call on Wipro and raised the target price to Rs 500 from Rs 370.

Close

As the numbers of these large-cap IT players came on the better side of expectations and the outlook for the sector looks positive, the question is if investors should stick to only these names or invest in tier-2 companies as well.

Analysts are favouring Tier-I IT firms because of their market reach, deal wins and strong balance sheet.

Gaurav Garg, Head of Research at CapitalVia Global Research, is of the view that these large IT names will continue to take advantage of low-cost operations and retain their strong position in the global IT industry.

"We observe top-tier Indian IT businesses have solid balance sheets with net cash surplus positions that is an added advantage. We advise investors to hold the mentioned stocks and expect a 10-15 percent appreciation from the current market price in a 3 to 6-month time horizon," Garg said.

"We don't advise investing in Tie-II companies at this moment. Tier-II companies typically carry debt because of acquisition debt taken by their private equity parent or because of debt taken to finance a large acquisition. We believe sticking with the frontline will be prudent," he said.

Garg said TCS, Infosys, HCL Tech, Wipro is his top four stock selection as per pecking order.

Jyoti Roy - DVP- Equity Strategist, Angel Broking, pointed out all the Tire-I IT companies reported their Q3FY21 numbers ahead of estimates.

"All Tire-I IT companies reported strong sequential dollar revenue growth of 3.9-6.2 percent. Deal wins were strong during the quarter with Infosys reporting a record new deal wins of $7.13 billion while TCS reported new deal wins of $6.8 billion," Roy said.

"Post the Q3FY21 numbers, we believe that investors should remain invested in the larger IT companies given their breadth of offerings especially in digital technologies which will allow them to win large deals."

Roy expects a structural improvement in growth rates for the IT sector as a whole over the next few years driven by greater adoption of digital technologies.

In the large-cap IT space, HCL Tech and Infosys are his top picks, followed by TCS and Wipro.

"In the mid-cap IT space, we remain positive on Persistent Systems," Roy said.

Prashanth Tapse, AVP Research, Mehta Equities, expects re-rating in IT services companies in FY21 on the back of strong growth prospects which has been seen in the wake of the COVID-19 pandemic.

"We believe IT spending has gradually increased irrespective of any sectors as the software is becoming a really integral part of our lives, and COVID just crystallised the need for digital transformation," Tapse said.

"For medium-term (3-6 months), we like Infosys & TCS on frontline Tier -1 stocks. With the change in global IT trends, a favourable currency movement, strong IT demand along with lower valuation, HCL Tech & Tech Mahindra looks promising," he said.

Suyog Kulkarni, a Senior Research Analyst at Reliance Securities, pointed out that the large Indian IT names have largely performed better than expected on both revenue growth and profitability.

He believes the technology spends of enterprises may remain resilient over the medium-term.

Kulkarni expects both Tier-1 and Tier-II IT names with diversified offerings, strong ecosystem partnerships and aggressive sales teams to be the key beneficiaries of this upcycle.

"Our pecking order amongst our coverage stock is Tech Mahindra, Mphasis, LTI and Mindtree," Kulkarni said.

Rusmik Oza, Executive Vice President, Head of Fundamental Research at Kotak Securities, underscored that most of the larger companies have started winning very large-sized transformation deals that provide fresh long term visibility.

Oza believes a few of the large companies could grow constant currency revenue in double digits in the next two years.

"Within the top four names, our preference in the pecking order is Infosys followed by HCL Tech and Wipro. Existing investors who have made 50 to 100 percent gains can look to reduce exposure marginally while others who would have entered in the last few months can stay invested," Oza said.

"For fresh investments, one can look at dips to accumulate some of the frontline stocks. It is ideal to stick with the top 5 IT names as most of the transformation mega deals are coming in their fold which will not be the case with the smaller players."

Disclaimer: The views and investment tips expressed by investment 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.
Nishant Kumar
first published: Jan 20, 2021 12:21 pm

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