Nifty IT up 41% in CY21 but analysts still bullish on the sector, here's why

Digital transformation and cloud services have become a must as accessing and maintaining data from remote places is vital.

In a sweet spot

The sector is teeming with positivity as the coronavirus pandemic dented revenue prospects of many companies and forced them to transfer jobs to developing countries where the charges are low.

"This has benefited the companies and helped them expand their customer base and increase the revenue,” Biswas pointed out.

Q1FY22 numbers have seen strong revenue growth and good deal wins for almost all the IT companies and analysts believe the trend is likely to continue for the rest of the year too.

"Overall, the IT industry is expected to grow at 14-15 percent in FY22. Listed IT companies together currently account for 65 percent of India’s software exports. Unlisted ones, including captive units, export the rest," said Siddharth Sedani, Vice President, Equity Advisory, Anand Rathi Shares and Stock Brokers.

The brokerage remains positive on the IT sector, given it is in an initial phase of strong technology up-cycle,he said. “Secondly, digital is becoming conventional across all verticals with strong deal momentum, he said.

With customers focusing on optimising costs, outsourcing of IT services is seeing a steady rise globally.

Santosh Meena, Head of Research, Swastika Investmart, said the prospects of the sector are very bright as COVID-19 is acting as a key catalyst for the exponential growth and managements are very confident about the coming years.

"Outflows from the Chinese tech stocks due to new regulations in China may result in inflows for the Indian tech companies as there is more stability in terms of policies and that may lead to further bullish momentum in the Indian IT stocks," said Meena.

The overall trend is strongly bullish, but after a vertical run, some consolidation or minor correction is likely and that will be a good buying opportunity, he said.

Chinese crackdown on its IT companies augurs well for the Indian IT sector.

"Chinese crackdown on local IT companies means a lot of IT sector allocation is moving to India. We expect the software services market to double over the next four-five years," said Vinit Bolinjkar, Head of Research, Ventura Securities.

Stocks to buy

Sedani has a “buy” call on TCS (target price Rs 4,260), Cyient (target price Rs 1,240) and Birlasoft (target price Rs 500).

Meena is of the view that midcap IT space may continue to outperform. L&T Infotech and KPIT technologies are his top picks, while in the largecap space, TCS and HCL Tech may outperform.

TCS and Infosys are the top picks of Biswas as these companies are the market leaders.

Sumit Pokharana, Vice President-Research, Kotak Securities, said investors should focus on engineering research and development (ERD) space within the IT sector.

"We expect a rapid recovery in global ERD spending in 2021 given anticipation of strong global economic recovery. Zinnov (a consulting and advisory company) expects global ERD spending to grow at a three-year CAGR of 8.6 percent to reach US$1.9 lakh crore by 2023. Digital engineering will drive growth with 18.7 percent CAGR over 2020-2023E," said Pokharana.

ERD exports growth has outpaced IT services exports in the past 4-5 years pre-COVID.

Tech Mahindra (target price Rs 1,580) is Pokharana's top pick from the sector. He is also positive on L&T Technology Services and HCL Tech.

Tech Mahindra, HCL Tech, Mindtree, Coforge and Persistent Systems are the top picks of Omkar Tanksale, Senior Research Analyst, Axis Securities.

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