Experts upbeat on Tata Consultancy Services and Infosys, though the lockdown and its effect on sectors like hospitality, travel and retail will have an impact on their earnings in the short to medium term.
The IT sector has continued to trade in line with equity benchmarks, as the segment has escaped the worst of the coronavirus-triggered lockdowns across the world. As businesses make the digital shift and work from home becomes the new normal, IT companies can hope for a good run.
Industry leader Accenture's stronger-than-expected results and commentary also set an encouraging tone for the upcoming earnings season for the Indian IT sector.
The US software consulting company reported better-than-expected earnings, with new bookings rising 4 percent to $11 billion in the third quarter ended May 31. The company, however, did reduce 2020 revenue forecast to 3.5-4.5 percent from 3-6 percent earlier.
"Point to note that majority of the IT companies, which get outsourcing business, did not face significant cancellations or pricing pressure from global clientele. Work from home (WFH) transition was smooth and had very little revenue impact," said Prashanth Tapse, AVP Research at Mehta Equities. Accenture's results and commentary bodes well for Indian IT sector, he said.
The Nifty IT index has gained 38 percent from its lows in March against more than 41 percent gains reported by Nifty50, while IT major TCS rallied 38 percent and rival Infosys was up 45 percent.
Experts remain bullish on both Tata Consultancy Services (TCS) and Infosys, though the lockdown and severely affected sectors like hospitality, travel, retail, etc will have some impact on their earnings in short to medium term.
"Technology stocks have always been in vogue, as they have generated returns consistently, and have less cyclicality. Also, in bear markets and stress times, investors prefer parking their funds with large tech companies as a defensive bet," Sumit Bilgaiyan, founder of Equity99 said.
“Investing in companies like TCS and Infosys is like investing in dollar with better returns. I think it will continue to generate greater returns in future.”
Tapse is also optimistic about both the companies.
"Technology is a sector which turned well in the pandemic scenario as the whole world is running on digital technology platforms. Industry data says spends on digital transformation would increase, offset by lesser spend on running operations and the cost saved, which will be invested back into digital transformation of business going forward. Reacting to the fundamental development, the Technology index outperformed well," he said.
After the March quarter results, TCS CEO Rajesh Gopinathan had said the company's earnings would be back to Q3FY20 levels in Q3FY21, which means the COVID-19 crisis could impact first half of FY21.
The risk could be US President Donald Trump’s move to support his job segment, but there, too, Indian companies are hiring locals, say experts.
"While the risk comes in as Trump issued a proclamation to suspend issuing H-1B visas and other work visas for the rest of the year. The proclamation is expected to impact a large number of Indian IT professionals and several American and Indian companies who were issued H-1B visas by the US government for the fiscal year 2021, beginning October 1. As a result, IT counters can see it as a concern," Tapse said.
TCS and Infosys are expected to show 5-6 percent sequential decline in constant currency revenue for the quarter ended June 2020, the first quarter where the full impact of lockdown and re-opening of economies will be seen.
Most analysts don’t expect these companies to give full year guidance but their deal pipelines, pricing pressure during lockdown, deal, changes in delivery model and trends across verticals will be key things to watch out.Disclaimer: The views and investment tips expressed by experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.