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IT stocks have been on a roll with shares of many companies hitting a record high today. Shares of TCS hit a new high of ₹3,560 with market cap of the Tata group company vaulting above the ₹13 lakh crore mark. Similarly, shares of Infosys and HCL Tech also zoomed to new high of ₹1,748.45 and ₹1,151.65 respectively.
“India’s IT sector is on a roll. Covid putting digitization on fast forward mode has improved the prospects of IT companies. India’s IT majors expect this upcycle to continue for 3 to 4 years,” says VK Vijayakumar, Chief Investment Strategist at Geojit Financial Services.
However, non-availability of requisite talent, high level of attrition and rising employee costs are likely to pose challenges for the industry, says Vijayakumar of Geojit Financial Services.
Analysts say that over the medium term, revenue and margin will be supported by focus on critical areas for clients such as process digitisation, migration to cloud-based technologies, workplace transformation, business-model transformation and enhanced cyber security controls.
Earnings performance of IT companies have also been strong. Within Motilal Oswal’s universe of 108 stocks, the IT sector has “reported one of the best sequential performances, led by strong sequential revenue growth of 4.5% (USD) and the highest ever deal pipeline, providing earnings visibility going forward,” the brokerage said.
Kotak Institutional Equities in a recent report said ingredients or drivers for increased technology spending will be present in the medium to long term and support growth for Indian IT services companies “Public cloud adoption is in still in early stages. “Only 15-20% of workloads have moved to public cloud—this can reach 60-70% in the next 3-4 years. Enterprises are geared up for accelerated digital transformation which will be a multi-year journey for most. Drivers for the same include (1) building resiliency in business and operations, (2) reimagining customer experience, (3) building new business models to cater to changes in customer behavior, (4) driving competitive differentiation, (5) catching up with digitally mature and cloud native competitors, (6) reducing operating costs and (7) increasing productivity and efficiency,” the brokerage said.
Though tight labor market conditions are making a dent in margin performance, growth visibility supports higher multiples, Kotak said.
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