3 min read.Updated: 31 Dec 2020, 08:23 AM IST Edited By Avneet Kaur
TCS, Infosys, HCL Technologies and Tech Mahindra remains top buys in the IT sector
Among midcaps, the brokerage prefers Zensar and Mastek based on attractive valuation.
New age technologies like cybersecurity (to protect business from work from home scenario), app development (to help customer transact virtually) and Cloud (to enable seamless & efficient online transaction) are witnessing robust growth. Analysts at ICICI Securities expect technology to become an integral part of a company’s spending and key to revenue growth. Hence, we expect increased allocation towards technology making IT companies indispensable to business. Digital technologies like cloud, cybersecurity, AI, Analytics are expected to play a critical role in driving this growth. The pace of digital acceleration has increased after Covid-19.
"We believe we are in the first phase of a multi-year technology transformation phase. we expect top five IT companies to register double digit growth in revenues (on average basis) in FY22E and FY23E. This, coupled with higher offshoring and cost rationalisation, will help IT companies maintain stable margins in FY22E & FY23E (albeit above FY20 levels)," says Devang Bhatt, Research Analyst, ICICI Securities.
The brokerage maintains positive view on the IT sector. TCS, Infosys, HCL Technologies and Tech Mahindra remains top buys in the IT sector. Among midcaps, the brokerage prefers Zensar and Mastek based on attractive valuation. Here's what the brokerage says:
Tata Consultancy Services (TCS) has witnessed strong deal wins and has balance sheet strength to carve out complex large deals. The recent Transamerica and Postbank deals are a few examples. Further, considering TCS’ digital prowess and ability to offer end to end solution makes it a key beneficiary of robust growth in digital technologies leading to double-digit revenue growth over a sustainable period. "This, coupled with industry leading growth & solutions, better capital allocation, stable management and higher revenue growth trajectory than witnessed in the past prompt us to maintain our BUY rating on stock with a revised target price of ₹3,410 per share," says ICICI Securities.
Post the management change, Infosys has invested in accelerating its digital stack and in improving sales & marketing efforts. This has resulted in revenue outperformance, narrowing of margin gap with the leader and positive momentum in deal wins. The recent multi-million dollar wins of Daimler and Vanguard are a case in point. The brokerage expects the company to continue to register healthy growth in revenues considering improving large deal win trajectory, digital acceleration and the company’s ability to provide end to end solution. "Further, we expect Infosys to register healthy margins in coming years led by rationalisation of onsite pyramid, automation, lower subcontracting cost and improvement in revenues. Hence, we maintain our BUY rating on the stock with a revised target price of ₹1,450 per share," says ICICI Securities.
The brokerage believes growing opportunities in cloud, automation and cyber security are a sweet spot for HCL Tech. HCL Tech also witnessed healthy traction in deal TCV (up 35% QoQ in Q2FY21) and deal pipeline. Further, the company expects ER&D revenues to improve QoQ with product revenues (being mission critical & growing traction) expected to be positive YoY. In addition, "we expect the company to register double digit revenue growth in FY22E and FY23E led by recovery across verticals, acquisition, improving deal wins," says ICICI Securities. It maintains a BUY rating on the stock with a revised target price of ₹1,105 per share.
Tech Mahindra (TECMAH)
Tech Mahindra expects customer experience to increase at a CAGR of 11.2% in FY20-24E and expects acquisitions like Born, Mad Pow, Bio to help capture this demand. The company generates US$900 million (~17% of topline) from cloud and is growing at 22%. Apart from capturing acceleration in digital technologies, the company’s focus on winning large deals & 5G will further boost revenues in coming years. This, coupled with an improving margin trajectory led by cost rationalisation and reasonable valuation prompt us to maintain BUY rating on the stock with a revised target price of ₹1,105 per share.