Nifty IT index hits record high on swift recovery hope; TCS hits new peak

Thus far in the financial year 2020-21 (FY21), Nifty IT index has rallied 46 per cent, led by the strong surprise on cost and cash management by the sector in April-June quarter
Shares of information technologies (IT) companies were in focus with Nifty IT index hitting an all-time high of 18,653 on the National Stock Exchange (NSE) on Tuesday on expectation of a swift recovery in BFSI (banking, financial services and insurance) sector to pre-Covid growth levels through FY21. The optimism comes on the back of receding supply challenges and steady technology budgets at large US banks.

That apart, the KV Kamath Committee, which identified 26 sectors most affected by Covid-19, recognised IT sector as "mostly unaffected".

Tata Consultancy Services (TCS), Infosys, Wipro, Larsen & Toubro Infotech (LTI), Coforge and HCL Technologies from Nifty IT index were up in the range of 2 per cent to 4 per cent on the NSE. Meanwhile, Mastek, Birlasoft, Cyient, Ramco Systems, Nucleus Software Exports and Newgen Software Technologies, the non-index stocks were up between 4 per cent and 7 per cent.

At 12:08 pm, Nifty IT index, the top gainer among key sectoral indices, was up 2.4 per cent, as compared to 0.45 per cent gain in the Nifty50 index. The IT index surpassed its previous high of 18,498 touched on Thursday, September 3, 2020.

Thus far in the financial year 2020-21 (FY21), Nifty IT index has rallied 46 per cent, led by the strong surprise on cost and cash management by the sector in April-June quarter (Q1FY21). The benchmark index, in comparison, gained 33 per cent during the same period.

"Despite the Covid-19 disruption, IT saw limited impact on revenue, strong deal signings, and the closure of certain marquee deals (e.g., Vanguard – Infosys and Ericsson – HCLT). This led the street to rethink the resilience, adaptability, and terminal growth rates of the business model. In conjunction with the fall in riskfree rates, the sector witnessed decent multiple re-ratings across the board," analysts at Motilal Oswal Financial Services said in sector update report.

As more of the physical economy migrates to the Digital space, Indian IT would be the key second-order beneficiary, in our view. Accordingly, we believe this rerating was due. Despite the strong rally, we continue to prefer Infosys, TCS, HCL Technologies, and Wipro among the large-caps and LTI, MindTree and Persistent Systems among the mid-caps, the brokerage firm said.

Those at HDFC Securities believe that the sector is poised for higher multiples, led by the longevity of high-growth period (current valuations imply ~5 per cent 10-year CAGR) with 'multi-year' growth tailwind from the economic crisis, the continuity of high (increasing) payouts, and global 'best in class metrics' across growth, free cash generation, and balance sheet strength.

Among the individual stocks, TCS hit a record high of Rs 2,384, up 2.5 per cent on the NSE in the intra-day trade today. The stock surpassed its previous high of Rs 2,357 on July 30, 2020.

ICICI Securities expects TCS to report improved growth in coming quarters mainly led by receding challenges on the supply side, ramp up of deals, vendor consolidation opportunities and traction in BFSI. The company also expects cloud, customer experience, automation and cyber security related digital technologies to gain traction in the long term.

"We believe TCS could see a decline in FY21E revenues mainly due to a weak first quarter. However, we expect the company to register healthy growth in FY22E mainly led by ramp up of deal pipeline and acceleration in digital technologies", it said. It maintain 'buy' rating on the stock with a target price of Rs 2,650 per share.

"TCS, with its high 31 per cent BFSI exposure, is in a favourable position to benefit from the vertical’s healthy growth dynamics, on the back of its comprehensive services portfolio, rich product offerings, robust scale and efficient, geographically-diverse delivery model," noted analysts at BOB Capital Markets.

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