Infosys, TCS can rally 20% in 3-5 years: Goldman Sachs

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The Covid-19 pandemic accelerated the pace of digitization across sectors and company size fueling cloud adoption thereby leading to demand for IT service providers. In fact, Goldman Sachs believes that not only the spending cycle will be longer (potentially 3-5 years) and stronger; the initial debate around the deflationary impact of cloud migration on IT service companies will start waning and leading to strong growth for IT service companies on the back of digital solutions created with cloud as the backbone architecture.

Going by Gartner’s cloud forecasts pre and post-Covid, the global brokerage firm sees that Infrastructure-As-A-Service (IaaS) forecasts have been revised upwards to the tune of 33%, 30%, 39% and 48% respectively for 2021, 2022, 2023 and 2024, pointing to an acceleration of migration to cloud across industry verticals and geographies.

That apart according to Gartner’s estimates that outsourced IT services spends are likely to grow at an 8.6% CAGR (compounded annual growth rate) over 2020-25 and account for 38% of overall enterprise technology spending, versus 33% in 2010 and 35% in 2020.

Stock play

Citing the long-term trend in cloud adoption & migration Goldman Sachs is bullish on the following stocks.

Infosys | Rating: Buy | Price target: Rs 2,117

Infosys to be the fastest-growing large-cap IT company in FY22E with constant currency USD revenue growth of 18%. Infosys, with its strong sales and marketing team for digital products, has managed industry-leading deal win momentum. The stock currently trades at 26.7X FY23E P/E for FY21-23E EPS CAGR of 19% against the Indian IT sector trading at 30.9X FY23E for FY21-23E EPS CAGR of 18%.

TCS | Rating: Buy | Price target: Rs 4,578

Goldman Sachs see several factors continuing to combine to help TCS gain market share: its strong domain expertise, contextual knowledge, wide set of digital capabilities, large scale with presence across diverse geographies and industry verticals, market leadership with a wide scope of services being offered which helps in stitching together large deals, and vendor consolidation. “TCS looks undervalued on both sector-relative P/B (price to book) vs. RoE (return on equity) as well as EV/GCI (enterprise value to gross cash invested) vs. CROCI/ WACC (cash return on capital invested to a weighted average cost of capital) frameworks,” noted a report released by Goldman Sachs.

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