These 22 IT stocks surge over 100% in 6 months; can Q2 numbers further propel the rally?

It would not be an exaggeration if we say that COVID-19 has opened new vistas for IT companies as people's dependence on technology has increased owing to a significant shift towards ed-tech, healthcare tech,  e-commerce, cloud computing, electronic payments, etc.

This claim is backed by the fact that most IT stocks have witnessed stellar gains in the wake of the coronavirus pandemic.

Since the outbreak of the coronavirus pandemic and consequent lockdowns, IT stocks have been logging strong gains, data from Ace Equity showed.

No component of the BSE IT index suffered a loss from March to September while as many as 22 stocks, out of a total 50, surged more than 100 percent. Out of 22, 10 stocks in the BSE IT index surged more than 200  percent and 4 raced more than 300 percent.

The trend may sustain.

The global IT major Accenture’s recent result and commentary on its outsourcing business, which is relevant for the Indian IT, corroborate an encouraging outlook for the Indian IT companies, brokerage firm Motilal Oswal Financial Services pointed out.

"As the quarter progressed, companies saw demand normalise as their deal pipelines largely returned to pre-COVID levels, with discussions being revived for deferred deals as well," said the brokerage.

As utilisation levels return to previous levels and positive operating leverage comes into play, margins are expected to be resilient.

As the COVID-19 pandemic has driven an increased focus on digital transformation, tech spending is expected to hold up better as customers invest to ensure business continuity and seamless operations.

Brokerage firm Edelweiss Securities believes Q2FY21 will be the trailer of a robust future. It expects Q2FY21 to mark the beginning of guidance upgrades by companies and estimate upgrades by the Street.

"Our multiple analysis via inputs from experts and commentaries of global companies suggest structural demand acceleration from 9-10 percent pre-pandemic to 12-13 percent in FY22 and 14-16 percent thereafter till FY27. We also estimate industry margins to expand at least 300bps over the next five years led by WFA (work from anywhere) led savings and lower non-business travel costs. The gap between EBITDA and EBIT will also reduce structurally with lower facility spends," said Edelweiss.

Edelweiss estimates 1.7-6.6 percent quarter-on-quarter (QoQ) constant currency revenue growth with a cross-currency benefit of 20-185bps QoQ.

"We will not be surprised if companies report better than our numbers as well in the current quarter which itself is almost double or at least 50 percent higher than consensus even in case of large and mid-caps like Infosys, HCLT, TCS, Mindtree and LTTS," said Edelweiss.

ICICI Direct is of the view that the IT companies may witness a healthy improvement in revenues on a QoQ basis mainly led by the ramp-up of past deal wins, traction in digital technologies and easing of supply-side

pressure.

"We expect Tier-1 IT companies to see revenue growth in the range of 1-3.5 percent in constant currency terms. This, coupled with a cross-currency tailwind of nearly 100-140 bps will further positively impact dollar revenue growth," said ICICI Direct.

"Margins of Tier-1 companies are expected to improve nearly 20-130 bps. Among Tier-2 companies, Coforge and Tech Mahindra are expected to post margin improvement of nearly 150-160 bps. This is mainly due to lower travel cost and lower general administrative cost improvement in utilisation, cross-currency tailwind partially offset by rupee appreciation," said ICICI Direct.

Brokerage firm JM Financial expects this trend to help drive improvement in the sector’s revenue growth prospects through the next few years.

"For the foreseeable future, we see upsides to growth; tech’s intensity of businesses has been rising through the years and may only accelerate as companies transition to a post-COVID world. We would not be surprised if Indian techs report significantly better-than-expected performance in the September quarter when they release results next month. This should provide more confidence in the ‘growth improvement’ thesis for the sector as a whole," said JM Financial.

JM Financial believes apart from increased offshore delivery, some general and administrative (G&A) savings in the form of lower travel and facility costs, along with the possibility of reducing sub-contracting expenses (as the ‘work-from-anywhere’ proposition gains more currency) would support improvement in margins for the sector over the foreseeable future.

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