Goldman Sachs forecasts 3rd wave of IT outsourcing

Goldman Sachs, which resumed its coverage on Indian information technology companies, said digitalisation at scale and Covid-19’s acceleration of ‘work from anywhere’ have boosted technology demand across industry verticals and geographies.

“Moreover, we note that IT outsourcing has seen strong pick-ups (lasting at least two years) after previous crises (such as Y2K and the GFC). These factors support our forecast of a third wave of IT outsourcing in FY21-23,” said Goldman Sachs analysts Sumeet Jain and Saurabh Thadani in the report

“We expect this multi-year technology upgrade cycle to have three key stages: a large-scale shift to cloud; the building of applications in the cloud native world; and collaboration between IT service vendors and customers to build new technology solutions. As a result, we forecast a sharp pick-up in FY22/23 dollar revenue growth of 13.1 per cent/9.7 per cent for the top 5 Indian IT vendors vs. -0.1 per cent in FY21 and a 4.6per cent CAGR in FY18-21,” they said in the report.

According to Goldman Sachs, Infosys is a Buy with a target price of ₹1,369. It is the fastest-growing large-cap IT firm in India with strong deal-win momentum;

Mindtree is a Buy with a 12-month target price of ₹1,795 as it’s focusing on digital and managed- service contracts, helping scale-up with a consistent increase in margins.

Revival in telecom vertical on 5G roll-outs and mid-teens growth in enterprise in FY22, led by strong deal wins and pipeline, are reasons for Buy on Tech Machindra with a price target of ₹1,089.

TCS (Buy, Target: ₹3,032) will be top beneficiary of third wave of IT outsourcing given business scale; for Mphasis (Buy, TP: ₹1,470), consistent execution with strong direct channel growth and de-risking away from DXC are key positives.

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Infosys, TCS, Wipro among top 5 ITeS players of 2020: Report

Why Wipro is Sell?

However, Wipro is Sell with a target price of ₹277 due to revival signs around execution are yet to be seen, with key vertical BFSI experiencing a slowdown, and valuation remains rich post share buyback.

It is is neutral on HCL Tech (target: ₹879) and L&T Infotech (₹3,386). “Our forecast of double-digit dollar revenue growth for the top 5 Indian IT vendors is backed up by the GS macro team’s forecast for 5.3 per cent US GDP growth in 2021 (vs. -3.5 per cent for 2020) with a base case calling for widespread introduction of Covid-19 vaccines in H12021 and increasing revenue growth for key industry verticals in 2021 (in line with our IT demand tracker).”