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India’s Nifty IT index scored its best show in a decade in FY21 as investors remained bullish on the sector’s prospects following a covid-induced surge in digitalization during the year. The index jumped 102% in the just-ended fiscal, widely outpacing a 71% rise in the benchmark Nifty.

Analysts believe that the IT sector will deliver better growth rates when companies declare their fiscal fourth- quarter earnings, carrying on a steady performance in the December quarter.

The IT index jumped 102% in FY21, driven by double and triple-digit growth in IT stocks, widely outpacing a 71% rise in the benchmark Nifty
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The IT index jumped 102% in FY21, driven by double and triple-digit growth in IT stocks, widely outpacing a 71% rise in the benchmark Nifty

According to HDFC Securities, the sector is expected to post its decade-best Q4 sequential performance. The pandemic has evidently accelerated the digital transformation agenda and key lead indicators remain positive, the brokerage said.

Among IT stocks, HCL Technologies Ltd, Infosys Ltd and Wipro Ltd are up 111-125%, while Tata Consultancy Services Ltd and Tech Mahindra Ltd advanced 74% and 75% respectively in FY21.

“The IT sector is trading at 1.5 times historical multiples. Positive stance on the sector is premised on the longevity of high-growth supported by multi-year industry tailwind from shift to cloud, increasing competitive advantage leading to continued market-share gains," said HDFC Securities in a 1 April note.

The sector, however, trades at a premium to its 10-year average valuations.

“While the sector trades at a 39% premium to its 10-year average multiple, we remain positive as we expect the sector to sustain double-digit top line growth in the medium term, led by larger deals on a full-scale digital transformation, tail of projects steered by increased focus on workplace management and higher spend on cloud migration by large corporates," said a Motilal Oswal Financial Services in a recent report.

Emkay Global Financial Services expects tier-I IT companies to report a sequential growth of 2.2-3.9% in the March quarter and 2.5-4.5% for tier-II firms in constant currency terms, thus maintaining strong revenue growth momentum from the December quarter.

Cloud, digital transformation, automation, artificial intelligence and cybersecurity areas continue to see healthy demand.

“We expect deal win total contract value (TCV) numbers to be strong in Q4 on the back of steady deal closures. Deal wins were healthy across companies and were largely driven by digital deals, core transformation deals and vendor consolidation opportunities. Although the absence of mega deals would lead to lower deal wins sequentially in companies like Infosys and Wipro. The ramp-up of large deals is progressing on expected lines and deal closures are also returning to a normal level as clients become comfortable with virtual mode discussions and negotiations. The deal pipeline remains strong and broad-based," said Emkay Global in a note on 5 April.

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