Almost every sector of the economy and business is hit by the coronavirus pandemic.
However, the magnitude of the impact of COVID-19 on all sectors is not uniform and there are a few, such as IT and telecom, that could in fact gain from the pandemic in the long run due to the nature of their business.
While sectors like mining, automobiles and consumer discretionary have been negatively hit by COVID-19, IT and telecom are the two sectors, as per experts, that have the opportunity to gain from it.
The telecom sector has been one of the best performing sectors during the lockdown period and has outperformed the Nifty significantly during the period.
Jyoti Roy, DVP Equity Strategist, Angel Broking highlights that telecom is one of the very few sectors which has strong revenue visibility despite the COVID-19 outbreak and is expected to be the biggest beneficiary from the data boom due to increased proliferation of work from home.
Narendra Solanki, Head- Equity Research (Fundamental), Anand Rathi Shares & Stock Brokers said: "Currently both the sectors have a positive outlook as far as long term is concerned and both these sectors have emerged favourite for the investors in the current crisis. However, Telecom has been better placed in terms of growth while IT is more of a stable and defensive play largely."
The telecom sector has been one of the best performing sectors during the lockdown period and has outperformed the Nifty significantly during the period.
"We believe some of the focus in terms of having acted as one of the key backbone providing connectivity and data services during the lockdown in the COVID-19 situation is likely to remain in place. The telecom companies stand to benefit as a gradual shift to remote work will drive demand for connectivity and networking infrastructure," Solanki said.
On the other hand, COVID-19 has triggered a sort of makeover of the IT business model in India. Experts point out that work from home has become the new norm and major companies in India are planning to make 75 percent of its workforce working remotely by 2025. These shifts in models could bring savings for IT companies going ahead as there will be a reduction in travel, admin and real estate cost.
Cut in budgeted spending of BFSI which constitutes a major chunk in revenue of the IT services industry would be one major reason from demand-side perspective amongst others.
Experts believe that the broad spread in services and depth of the portfolio would make the IT companies more resilient.
"IT spending is estimated to decline by 8 percent in 2020 against a 5.8 percent growth forecasted earlier by Gartner as the focus will turn to cost reduction. A broad-based recovery is expected in the latter half of FY21 powered by spending in healthcare, insurance and education segments. Given positive prospects and stability in business we remain positive on the sector for the long-term," said Vinod Nair, Head of Research at Geojit Financial Services.
"Work from home and social distancing have paved the way for remote working, video conferencing and other telecommunication technology which is a key driver for the telecom sector. These drivers could help companies to sustain their user base in the short to medium-term. The overhang of AGR dues might force telcos to bring tariff hikes and funds, which could be inevitable in FY21 and FY22. We remain positive in the long term due to trio monopoly and a better outlook for demand while cautious in the short to medium–term due to high valuation, heavy balance sheet, cash flow issue and fund requirements," Nair said.
Stocks to watch out for
Analyst: Jyoti Roy, DVP Equity Strategist, Angel Broking
Bharti has posted strong ARPU growth in Q4FY2020 driven by tariff hikes of nearly 35 percent in November 2019 by all telecom operators.
The company is expected to maintain a strong growth trajectory in FY21 driven by ARPU growth and market share gains. The analyst believes that any further tariff hikes by telecom companies in FY21 could be a major positive for the stock given that tariffs are still very low.
The analyst has a 'buy' recommendation on the stock with a target price of Rs 672.
As per the analyst, L&T Infotech is one of the best bottom-up play in the IT sector given it’s low exposure to service-oriented verticals like travel and tourism which are amongst the worst impacted due to the COVID – 19 outbreak.
"We expect L&T Infotech to outperform the IT sector going forward given that client-specific issues are now behind for the company. The company had a very strong deal wins in the third and fourth quarter of FY20 which should mitigate the impact of the COVID-19 crisis to some extent in FY21," said the analyst.
The analyst has a 'buy' recommendation on the stock with a target price of Rs 2,145.
Reliance Industries (RIL) is the parent company of Reliance Jio which is the largest telecom company in India with a subscriber base of 38.8 crore as of March 2020.
The company also has a dominant presence in refining, petrochemicals and retail business. JIO Platforms which houses the telecom business has attracted investments from marquee investors like Facebook, Silver Lake Partners, General Atlantic, KKR, etc., of Rs 1,04,327 crore.
"Investments by such marquee names in Jio platforms reinforce our confidence in the management’s ability to transform the company from a brick and mortar to a digital play," said the analyst.
The analyst has a 'buy' recommendation on the stock with a target price of Rs 1,748.
Analyst: Vinod Nair, Head of Research at Geojit Financial Services
The company reported healthy quarter numbers with a stable set of margin expansion.
As per the analyst, the near-term margin concerns and revenue decline due to COVID-19 is already factored in the valuations. Going ahead, on a long-term perspective there could be opportunities in cloud, cybersecurity that could help accelerate revenue growth.
"We expect the company’s topline to grow with the reorganization, benefit from HCL Software and inorganic growth. We estimate PAT to grow at 9.2 percent FY19-22E CAGR and have a 'buy' rating on the stock with a target price of Rs 690 based on 14 times FY22E adjusted EPS," said the analyst.
Analyst: Narendra Solanki, Head- Equity Research (Fundamental), Anand Rathi Shares & Stock Brokers
Bharti Airtel
"We remain bullish on Bharti Airtel in the telecom space. The company's revenue prospects look decent as the company has been able to record steady improvement in the performance of African operations over last the few quarters," said the analyst.
The analyst underscored that the intense competition in the domestic telecom industry has gradually lessened with a reduced number of players. Given the current scenario, Bharti Airtel is likely to enjoy further market share as another key player -Vodafone Idea- struggles to survive in the market.
Tata Consultancy Services (TCS)
TCS has delivered a double-digit revenue CAGR of 10.5 percent in the last three years. Its revenue has grown from Rs 1,08,646 crore in FY16 to Rs 1,46,463 crore in FY-19.
The company has grown consistently at industry-leading growth rates on the back of its strategy of adding new clients, winning large deals and co-innovating with customers.
"We believe the challenges related to COVID-19 would play out in the next two quarters. TCS has indicated that its revenues in the next two quarters could drop similar to the 2008 global financial crisis (which we believe could be anywhere between 7 percent and 8 percent YoY drop). The company expects a revival in H2FY21E on the back of a ramp-up of existing deal wins and market share gains," said the analyst.
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