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Why IT stocks outperformed in volatile market today

"We resume coverage of Indian IT with a strong positive outlook," Goldman Sachs said in its report and gave a 'buy' rating to IT majors like Infosys, Mindtree, TCS, Tech Mahindra & Mphasis. The brokerage house gave a 'sell' on Wipro and a 'neutral' on HCL Tech and L&T Infotech

Rupa Burman Roy | December 23, 2020 | Updated 11:01 IST
Why IT stocks outperformed in volatile market today
Goldman Sachs forecasted a sharp pick-up in FY22/23E USD revenue growth of 13.1%/9.7% for the Top-5 Indian IT vendors vs. -0.1% in FY21E and a 4.6% CAGR in FY18-21E

Nifty sectoral indices were largely in the green on Tuesday's volatile session, with Nifty IT index, up 2% leading the list of gainers. Most IT stocks, including Mindtree, HCL Tech, Tech Mahindra, Infosys and TCS traded in the green in morning trade on Tuesday after global financial firm Goldman Sachs resumed coverage on the IT sector and said the third wave of the IT outsourcing cycle is ahead.

Even when broader markets were lackluster earlier, IT stocks were trading with gains amid weakness in the Indian rupee against the US dollar. All the Nifty sectoral indices, except Nifty IT, fell into red early morning.

The Nifty IT index was up about 2%, with Birlasoft, Infosys and L&T Infotech hitting their respective 52-week highs.

"We resume coverage of Indian IT with a strong positive outlook," Goldman Sachs said in its report and gave a 'buy' rating to IT majors like Infosys, Mindtree, TCS, Tech Mahindra & Mphasis. The brokerage house gave a 'sell' on Wipro and a 'neutral' on HCL Tech and L&T Infotech.

While Infosys rose 3.66% to day's as well as an all-time high of Rs 1,219.4 today, TCS was trading 2% higher at Rs 2,874. Mindtree gained over 7% intraday to Rs 1,529 and HCL Tech gained 4.48% to Rs 908, its new high. Tech Mahindra also hit a new high of Rs 942.15, rising 3.97% higher intraday.

Goldman Sachs forecasted a sharp pick-up in FY22/23E USD revenue growth of 13.1%/9.7% for the Top-5 Indian IT vendors vs. -0.1% in FY21E and a 4.6% CAGR in FY18-21E.

"Our forecast of double-digit USD revenue growth for the Top-5 Indian IT vendors is backed up by the GS macro team's forecast for 5.3% US GDP growth in 2021 (vs. -3.5% for 2020) with a base case calling for widespread introduction of COVID-19 vaccines in 1H2021 and increasing revenue growth for key industry verticals in 2021 (in line with our IT demand tracker)," Goldman Sachs said

"We expect EBIT margins to improve in FY22E/23E led by operating leverage with double-digit USD revenue growth, a higher offshore mix, employee pyramid optimization, and an automation-first approach leading to non-linearity in revenues and lower sub-contracting costs," it added.

The brokerage added in its note,"The average wage differential for technology developers in India and the US remains high at >5X. This has helped drive the movement of technology roles to India, particularly at a time when COVID-19 has resulted in the expansion of the WFA environment. As a consequence, the Trump administration has enacted much stricter rules around the granting of H1B visas for Indian IT firms, with denial rates for fresh approvals increasing significantly from the low single digits in 2016 to 25-30% last year. In contrast, we expect President-elect Joe Biden and the Democratic Party to follow through on the much more liberal immigration policies they advocated during the presidential campaign. Under a Biden administration, we would expect the H1B visa approval process to be less stringent, which would benefit Indian IT firms with a lower reliance on sub-contractors in the US."

This was also following Accenture's earnings report that suggested a healthy forecast and brightened the outlook for Indian IT firms. Accenture reported better-than-expected results for the quarter ending November 30, suggesting strong revenue growth, order bookings. Accenture also raised guidance, underscoring the accelerated demand for technology transformation. Accenture's revenue stood at $11.8 billion, up 2% YoY, while EBIT (earnings before interest and tax) margin at 16.1% YoY.

Share Market Highlights: Sensex ends 452 points higher, Nifty at 13,466; Infosys, HCL Tech top gainers

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