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IT sector will continue to trade at higher multiples well supported by improving visibility (strong deal wins, faster ramp-up), sustained margins, improving free cash flows and improving demand environment across verticals.
The Q4FY21 results for the IT (information technology) sector was a mixed bag with some hits and misses. As 3 out of 5 tier-1 or large IT companies reported a miss on revenue estimates. “The miss is only due to moderation of revenue growth post 2 quarters of strong growth. Revenue growth was led by strong demand momentum in BFSI and sustained recovery in manufacturing & retail sectors,” said Aniket Pande of Prabhudas Lilladher.
Despite a miss on the revenue front management commentary across the board indicated a record-high deal pipeline and broad-based demand environment characterized by cost take-out and transformation led outsourcing or lift-shift-transform deals and digital and cloud adoption led deals. Consecutive quarters of record hiring (freshers) also indicate strong optimism in demand. The hiring trend to remain strong in FY22 is another indication of strong growth momentum going ahead.
However, a raging second wave of Covid-19 can be a dampener for the IT sector. The supply-side constrain can be partially offset by levers such as pyramid optimization, increase in offshoring, controlling attrition and leverage from revenue growth, stated a report by Prabhudas Lilladher.
The brokerage firm is positive on the Indian IT Sector and believes that the sector will continue to trade at higher multiples well supported by improving visibility (strong deal wins, faster ramp up), sustained margins, improving free cash flows and improving demand environment across verticals.
Here are the top picks from the sector:
Infosys | Target price: Rs 1,632 | Upside: 23%
Management mentioned that the demand environment is extremely strong with a robust deal pipeline. They are confident of sustaining the traction of large deal wins and gaining market share in FY22.
TCS | Targer price: Rs 3,636 | Upside: 19%
TCS will be the major beneficiary of vendor consolidation, supported by its scale and end-to-end services capability. A strong payout ratio, more focus on WFH will help in improving margin tailwinds. Industry tailwinds and TCS specific strengths (lowest attrition, strong execution, access to large talent pool, and company’s confidence in successfully implementing its WFH strategy sustainably) would enable TCS to maintain industry-leading margins and returns.
Coforge | Target price: Rs 3,762 | Upside: 11%
Coforge revenue is anticipated to grow by 31.6% YoY USD in FY22E led by its ability to leverage acquisition and partnerships to materially accelerate revenue growth and scope to further improve margins.
(Disclaimer: The recommendations in this story are by the respective research and brokerage firm. Money9 & its management do not bear any responsibility for their investment advice. Please consult your investment advisor before investing.)