You can earn up to 38% by downloading these IT stocks to your portfolio

COVID-19 pandemic has been a trigger point for increased offshoring and increased tech spends and this trend is here to stay as many companies are at an early stage of digital adoption. The biggest beneficiary of this is Indian software companies that will witness strong revenue acceleration driven by higher demand and pay-off from investments in new-age technologies and talent base.

Focus on Big 4

Reliance Securities has come out with a report titled ‘India IT Services – Well-placed to Witness Multi-Year Growth Acceleration’. The brokerage house is of the opinion that the top four Indian IT firms TCS, Infosys, Wipro and HCL Tech are expected to witness a 32-38% upside from the current level. The key factors for this upside are around 70% of enterprises are at an early stage of digital adoption giving a huge opportunity for growth. Digital services are likely to clock 15-20% CAGR in the medium-term led by Cloud adoption. Potential acquisition opportunities of captive units and vendor consolidation will help the IT players gain market share. A resilient business model and consistent cash return policy will help command premium valuations.

Infosys | Target Price – Rs 1,920 | Upside – 38%

Infosys underperformed TCS on the revenue growth front in the larger part of the last decade. Since 2017, the new CEO has been successfully executing a three-year strategy with initial calibrated investments in capability, talent and localization. Digital business has crossed 50% of the top-line (3QFY21 growth of 31% YoY).

“Infosys to report industry-leading revenue CAGR of 13.3% over FY21-FY24E driven by a surge in mega deal wins and higher technology spend. Mainstreaming of digital business would continue to support Infosys in witnessing accelerated growth in the medium-term. Margin to improve to 24-25% level over FY22E-FY24E on the back of WFH model (~33% of the workforce) and automation benefits compared to 21-23% over FY19-FY20. The stock deserves multiple rerating considering the industry-leading EPS CAGR of 15.7% in FY21E-24E, higher EBIT margin and attractive dividend yield of 3% (FY24E),” noted the report.

Wipro | Target Price – Rs 565 | Upside – 35%

Wipro is one of the pioneering IT services firms in India, which offers IT, Engineering, Business Process Outsourcing (BPO) and Consulting services. Restructuring efforts, which include simplified operating structuring, step-up in capability upgrade and talent management bode well for Wipro in the medium-term.

“Wipro’s revenue is expected to grow at the industry average driven by the recent surge in deal wins, prioritized focused areas and step-up in investment in talent and partnerships. At CMP, the stock trades at 16.3x of FY24E EPS, which is a 25% discount to the average of larger peers i.e. Infosys and TCS,” said Suyog Kulkarni, Research Analyst of Reliance Securities.

HCL Technologies | Target Price – Rs 1,320 | Upside – 33%

HCL Technologies offers an integrated portfolio of products and services through three business units i.e. IT and Business Services; Engineering and R&D Services; and Products & Platforms (P&P). The company is the key beneficiary of hybrid Cloud migration with its multi-decade experience in IMS offerings and strong ecosystem partnerships. Additionally, the company follows an acquisitive capital allocation policy and has spent US$2.1bn during the last 3 years on acquisitions.

“HCL Technologies is poised to clock revenue growth of 11.7% CAGR over FY21E-FY24E driven by consistent transformation deal wins, multi-decade experience in IMS/Cloud services offerings and rising share of P&P business. At CMP, the stock trades at 15x of FY24E EPS, which is 37% discount to larger peers Infosys and TCS against historical 22% discount,” added the report.

TCS | Target Price – Rs 4,180 | Upside – 32%

Tata Consultancy Services (TCS) offers full-stack services and enjoys a deep-rooted relationship with large global banks, retailers and technology names. It remains in the leader’s quadrant in terms of capability matrix. The company enjoys industry-leading return ratios of >40% (1,000bps higher than Infosys) and a consistent cash return policy.

“TCS is expected to gain market share, which will be supported by consolidation of IT vendors and captive monetization efforts. The company’s revenue will clock 12.6% CAGR over FY21-24E propelled by a robust Last Twelve Month (LTM) book-to-bill ratio of 1.4x. The deal environment to remain buoyant in the medium-term. While the earnings before interest & tax margin to expand to 26% in FY22-FY24E (vs. 24.6% in FY20) propelled by hybrid working model; increased automation; and higher operating leverage,” said Kulkarni.

(Disclaimer: The recommendations 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.)