IT shares gain ahead of Q1 earnings; TCS hits all-time high, Infosys up 4%

Accenture's recent result and commentary have set a baseline expectation for Indian IT companies
Shares of information technology (IT) companies were in focus on Tuesday with the Nifty IT index gaining more than 1 per cent ahead of the announcement of their June quarter (Q1FY20) results. Tata Consultancy Services will kickoff the earnings season by announcing its numbers on Thursday, July 9.

Shares of TCS hit an all-time high of Rs 2,303, up 1.8 per cent on the National Stock Exchange (NSE) in Tuesday's trade. The stock surpassed its previous high of Rs 2,296, touched on September 3, 2019.

Infosys, the top gainer among Nifty IT index, was up nearly 4 per cent to Rs 792 on the NSE. The stock is 7 per cent away from its 52-week high level of Rs 847, hit on September 6, 2019.

NIIT Technologies, Mindtree, Wipro, HCL Technologies, and Tech Mahindra from Nifty IT index gained up to 7 per cent on the NSE. At 09:51 am, Nifty IT index, the top gainer among sectoral indices, was up 2 per cent, as compared to a marginal 0.06 per cent decline in the Nifty50 index.

Accenture's recent result and commentary have set a baseline expectation for Indian IT companies. While supply-side issues eased in the quarter, demand issues persist and are more pronounced in some verticals (e.g., retail, travel, transportation and hospitality, and aerospace).

Analysts at ICICI Securities expect companies with higher exposure to travel, hospitality & retail to witness a sharper fall in revenues. In addition, companies with higher BPO revenues are also expected to be impacted by supply related challenges and lower client approval for work from home mode. The sharp fall in revenues is also expected to negatively impact margins of IT companies.

"While the pandemic is expected to impact near-term growth, we expect a revival in H2FY21E. This, coupled with increased traction in digital technologies, vendor consolidation opportunity for Indian IT players, improved IT spending bodes well from long term growth perspective," the brokerage firm said in IT sector update.

Motilal Oswal Securities expects margin disruption to not be as severe as feared due to a lower-than-anticipated pricing impact and other tailwinds (deferred wage hikes, currency depreciation, absence of certain G&A/PM Cares fund related expenses) partially offsetting the COVID-19 impact.

"Indian Tier I techs will have a weak June’20 quarter, with sequential revenue falling 4-8.1 per cent. EBIT (earnings before interest and tax) margin decline, however, may be limited by currency depreciation and other cost optimisation measures," analysts at Emkay Global Financial Services said in sector update.

The brokerage firm sees greater confidence around the underlying belief on stability in business in Sep’20, with growth recovery in H2FY21 along with an outlook on pricing, possible offshore shift, and the likelihood of leveraging balance sheet strength for inorganic growth.

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