Analysts see multi-year growth cycle awaiting IT sector

By Urvashi Valecha

Markets on Wednesday were driven up by the strong rally in the information technology (IT) stocks, thanks to the surge in the prices of IT services companies like Infosys and Wipro. The Nifty IT index rose 2.36%, which is higher than the 1% gain in the 50-share benchmark. Market experts continue to remain positive on the sector on account of a multi-year growth cycle awaiting the sector.

Currently, stocks such as Infosys and Wipro are trading at an FY22 price earnings multiple of 24.9 times and 18.2 times. Motilal Oswal Institutional Equities in its report said, “Despite rich valuations, we remain positive on the sector alluding to the multi- year growth cycle awaiting the sector.” The Nifty IT index has year to date risen by 50.18% which is a sharp outperformance compared to the Nifty which has rallied by 11.64% during the same period. Even in December, the Nifty IT index has rallied by 9.01% whereas Nifty rallied by 3.75% during the same period. However, given the strong run up in the stocks over the last four months, experts believe that there could be some consolidation in the stock prices.

Deepak Jasani, head – retail research, HDFC Securities, said, “Given the rally in the IT sector over the last three to four months, there could be another 5% to 7% rise in the stock prices from here on following which there could some consolidation going forward for the next few quarters before the next round of re-rating of the sector takes place again if the intervening quarterly numbers are supportive.”

The IT sector going forward is expected to perform well owing to the strong deal pipeline which is expected to remain going forward and has continued to support the IT sector. Sanjeev Hota, head of research, Sharekhan by BNP Paribas said, “We believe that IT sector will continue to do well going forward given that the MNCs are expected to monetise their captives, they are putting more funds in transformation deals so, the strong deal pipeline is expected to continue and Indian IT MNCs are poised to gain market share.”

Share prices of companies such as Wipro, Infosys and HCL Technologies hit their 52-week highs on Wednesday after the IT giants announced large deal wins. Infosys recently announced a mega-deal with Daimler that involves IT infrastructure transformation. The stock has rallied by 70% so far this year. According to Kotak Institutional Equities, Infosys provides comfortable visibility of double-digit growth in FY 2022. Large deals are critical to provide a kicker to growth, especially as spending on legacy IT declines, said the brokerage.

On the other hand, Wipro bagged a deal with Metro that would provide the tech giant with visibility of at least $700 million of revenues over a period of five years. The tech giant has clocked gains of 55% year to date. The IT company which saw Thierry Delaporte become the chief executive officer in 2020 has announced an array of deals this calendar year which includes companies such as Metro, Marelli, E.ON and John Lewis. Kotak Institutional Equities, said, “The Metro deal reinforces Wipro’s credentials and lends comfort that the historical gap in growth rate with peers will compress even as it may not be fully bridged.” The brokerage has maintained a ‘buy’ rating on Infosys and an ‘add’ rating on Wipro.