Strong or better-than-expected results in the March 2018 quarter, not only from large information technology companies such as TCS, but also from small- to mid-sized companies such as Mindtree and Cyient, confirm pretty well the optimistic outlook for the sector predicted by Nasscom earlier in February. Continued weak rupee against the dollar (beyond ₹65) in Q4 has also helped in the good performance of IT companies.

The outperformance of the Nifty IT index over other sectoral indices and even the benchmark index Nifty 50 continues. It has clocked the highest return of 21 per cent till date in 2018. Market capitalisation (those with ₹1,000 crore and above) of 32 companies have risen 17 per cent year-to-date — the highest gain in the last four years, according to data provided by Capitaline (as on April 20) — led by TCS, HCL Technologies, Tech Mahindra, Mindtree, MphasiS and Hexaware Technologies.

Given the sustainably favourable outlook of the sector, the rally in IT stocks is expected to continue.

“We believe, large Indian IT companies are entering a V-shaped earnings recovery phase, enabled by huge digital-led demand, potential margin improvement as digital gains scale and currency tailwind and consistent buyback, akin to Accenture and Cognizant, which will lead massive outperformance in earnings versus net profit growth.

“The above factors cumulatively indicate that earnings growth rate can jump almost 3x from a mere 3-5 per cent over FY16-18 to 13-15 per cent over FY21. We reiterate our structural bullish call on the sector led by the falling proportion of low-growth business being replaced by high-growth digital business,” said Edelweiss Securities in a note on Monday.

Realignment process

Elara Capital believes that the realignment process back from financials to IT has just begun and it will pick up further given the historical trend. “Since the start of 2018, we have started seeing signs of stronger outperformance and breakouts emerging in the most under-allocated names.

“We think despite one leg of big move in IT, the uptrend will be a sustained one. This trend will gain strong pace once we see financials turning weak (almost on the verge of a breakdown), as there could be faster shift of capital into IT,” Elara said in a note today.

On Monday, companies such as L&T Infotech, NIIT, Tata Elxsi, NIIT Technologies, L&T Technology Services, MphasiS, Mindtree, Persistent Systems, HCL Technologies and KPIT Technologies gained in the range of 1-8.5 per cent in continued reaction to robust results by TCS.

With the stock of TCS hitting $100-billion market capitalisation, many analysts are not comfortable with the stock’s valuation despite the robust outlook guided by the management for FY19. “TCS is currently trading at par with Accenture on the valuation front (versus 18 per cent discount to Accenture trades three months ago),” pointed out Madhu Babu, analyst at Prabhudas Lilladher.

Sandip Agarwal, analyst at Edelweiss Securities, added: “TCS’ premium valuations restrain us from recommending it in spite of the company’s best execution and market leadership.”

Related Topics
comment COMMENT NOW