IT stocks gain focus on Accenture strong show

Our Bureau Mumbai | Updated on September 25, 2021

The Nifty IT 1-year forward PE multiple stands at 31, which is at around 30 per cent premium to the broader market

IT stocks gained remained in focus on Friday after Accenture reported a strong set of numbers and outlook.

Nifty IT, after witnessing a fresh 52-week high of 37,823.15, witnessed profit-booking later in the day. It closed 0.78 per cent higher at 37,103.25.

Multiple IT stocks hit record highs in today’s rally. Larsen and Toubro Infotech recorded the highest gains at closing. After recording a fresh 52-week high of ₹6,498.50 on the NSE, it closed 3.53 per cent higher at ₹6,250.00

LTI was followed by HCL Tech which gained 2.37 per cent at closing and recorded a fresh 52-week high of ₹1,377.75 during the day.

Infosys and Mindtree ended 1 per cent higher after recording fresh 52-week highs of ₹4,733.90 and ₹1,788.00, respectively.

Infosys led the market rally in the opening session as BSE Sensex surpassed the historic 60,000 mark and Nifty neared 18,000.

Mphasis was up 0.82 per cent at closing, after a fresh 52-week high of ₹3,534.60. Wipro closed 0.33 per cent higher, after recording fresh year-highs of and ₹699.15. TCS closed 0.25 per cent higher.

OFSS ended flat while Coforge and Tech Mahindra ended lower.

Accenture reported strong Q4FY21 results, surpassing market expectations on all financial and operational terms.

The company’s revenue for the quarter stood at $13.4 billion, a growth of 24 per cent year-over-year.

It witnessed new bookings reach record-high of $15 billion, up 7 per cent YoY during the quarter, while total booking for FY21 stood at $59.8 billion, up 20 per cent YoY.

The company’s management has provided revenue guidance of 12 per cent-15 per cent growth for FY22. This is one of the highest starting guidance in recent history.

Brokerages bullish

Brokerage firms remain positive on the read-through for Indian IT firms.

Axis Securities in a note said, “We believe strong investments in digital technologies, cloud transformation, IoT, As-a-Service, and Machine learning across verticals will accelerate the companies’ revenue growth. The macroeconomic tailwinds will also help in garnering larger deals.”

“On a vertical front, the BFSI vertical witnessed strong traction in the cloud transformation and is likely to showcase the fastest recovery after COVID -19 outbreak. Moreover, the Healthcare & Pharmaceutical industry, too, is witnessing strong traction across geographies. IT services companies in India are witnessing strong deal bookings and deal pipelines in the verticals such as BFSI, Healthcare & Pharmaceuticals, Manufacturing, and Hi-tech & Media. However, Retail, Travel & Tourism, Aerospace, and defence are likely to recover slowly and witness lower demand in the forthcoming quarters. Overall, we remain optimistic about the IT services companies in India,” it added.

According to Motilal Oswal Research, Accenture’s “solid and conservative guidance for FY22” and strong headcount addition provides visibility to India’s IT growth momentum.

“While supply-side challenges remain a point of concern, ACN’s margin guidance implies margin strength will continue in FY22. We maintain our positive stance on the sector as we expect sustained growth with stable margin. Infosys and HCL Technologies remain our preferred picks within Tier I IT,” it said.

According to Emkay Global, a broad-based demand uptick and healthy order booking for the company will bode well for Indian IT peers.

“Though attrition remains an issue across the industry, clients have become more amenable to price increases, especially for digital projects as they recognize industry-wide supply-side constraints, which should support margins. The Nifty IT index rose nearly 30 per cent/41 per cent/86 per cent in last 3M/6M/12M vs. about 14 per cent/20 per cent/60 per cent of the Nifty. We believe strong demand environment, sustained acceleration in revenue growth and robust order booking will support higher valuations,” it said.

Premium to sustain

As per Reliance Research, the Nifty IT 1-year forward PE multiple stands at 31, which is at around 30 per cent premium to the broader market.

“Further, Nifty IT traded at 10-30 per cent premium to broader market over FY10-FY14, when the IT names were reporting double-digit growth. Looking ahead, we expect Nifty IT to trade at a premium to broader index driven by: (1) likelihood of double-digit revenue growth over FY21-FY24E and medium term growth resiliency due to increasing technology adoption; (2) increasing collaboration with the large hyper-scalers and SaaS companies; and (3) peer set companies (with ~20 per cent revenue growth) are trading at higher multiple,” it said.

However, ICICI Securities maintained caution stating that the steady state growth rates unfolding do not seem to justify the magnitude of re-rating.

“Nifty IT is currently trading at a staggering about 82 per cent premium vs long-term averages (+35 per cent in case of Nifty) led by (1) expectations of structurally higher growth post-Covid, and (2) street’s preference for ‘relative’ near-term predictability on the back of second wave impact on domestic sectors. Global tech stocks like Facebook, Alphabet etc., the primary beneficiaries of digital adoption are now way cheaper (22-23x, 1-yr forward PE) than Nifty IT (about 32x) despite consensus expecting significantly higher growth rates for the former,” it said.

Published on September 24, 2021

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