IT sector has been one of the top-performing sectors in India since the outbreak of the novel coronavirus as firms accelerated the pace of digitisation and shifted focus on the adaption of technology. The sector gauge, Nifty IT has risen over 90 percent in the last one year compared to a 60 percent rise in the benchmarks.
"Over the past year, IT index’ re-rating (16x to 23x) and performance have been supported by the increase in consensus earnings estimate of 20 percent and 30 percent for tier-1 and mid-tier stocks, respectively. FY21 closed with low single-digit revenue growth, 8 percent/20 percent profit growth (tier-1/mid-tier)," HDFC Securities said in a recent report.
Even though the domestic brokerage is positive on the sector, it has downgraded Tata Elxsi and Persistent to "add" from "buy" and remains constructive on the sector. Its preferred picks include Infosys, HCL Tech, Mphasis, LTI and Sonata.
While mid-tier growth outpaced tier-1 IT, tier-1 IT outperformance was led by TCS and Wipro in revenue and Infosys in margins (underperformed on revenue though).
It added that mid-tier IT had stronger pockets of outperformance, led by Tata Elxsi, Cyient, Mastek, Sonata Software with the top scorers posting almost double-digit sequential growth. The impact of the wage hike was offset by the continued increase in the offshore mix and operating leverage (volume/utilisation).
HDFC further stated that the earnings upgrade over the past three months has been led by Persistent, Tata Elxsi, Mindtree, and Cyient in mid to high single-digit and concurrently over 30 percent stock performance.
Key indicators also remain strong, it added including deal wins, recovery in consulting, improvement in deal market share by TCS and Infosys, and supply-side commentary.
"The more apparent near-term challenge is supply-side impact in India and rising attrition, but we believe on anecdotal evidence that attrition has peaked and the taper will reflect with a lag from 3Q. In the interim, the supply-side crunch for highly-skilled talent will discourage price aggression in large deals," the report stated.
Following 10 percent earnings growth in FY21, the brokerage expects the sector to deliver 15 percent CAGR as revenue accelerates to 15 percent in FY22E and then normalises to 11 percent in FY23E.
Going ahead, key growth drivers for the sector include:
(1) Strength in BFSI vertical supported by continued growth in tech spend, mainframe performance, and strong pipeline/bookings led by system rationalisation/digital transformation
(2) Recovery in ER&D segment based on macro recovery in US/Europe, strong industry outlook by the largest provider and uptick in manufacturing vertical with continuity in strong deal volumes
(3) Investments and alignment with partners including hyper scalers/SaaS.
(Edited by : Ajay Vaishnav)
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