Rapid digital transformation has been steering the focus towards IT firms for the last few months. The market commentary around the same was upbeat till a few months back.
Stocks around the world scaled a record high as expectations of more monetary stimulus also lifted demand for risky assets.
Information Technology stocks have outperformed equity benchmarks over the last couple of months, as investors expect rapid digitalisation across the globe. However, domestic brokerage and research firm ICICI Securities, in a recent note, has sounded the bugle of caution taking cues from global technology giants. The note, co-authored by Sudheer Guntupalli and Hardik Sangani, warns investors about the possibility of a huge disconnect between hype and reality around accelerated cloudification / digitalisation post-Covid. They added that the September 2020 earnings/outlook of global technology firms like Microsoft, AWS, SAP, etc corroborates their thesis.
“Rather than reporting a major spurt, incremental sales on-quarter basis booked by AWS and Microsoft ICS (Azure) post-Covid was weak,” they said. In the nine months of 2020 so far the sales numbers range somewhere between -24% to 5% on-year basis. This does not mirror the hype around cloud being the backbone for business continuity during the lockdown period across the globe. “Gartner recently indicated that cloud ‘scaled up’ during Covid and ‘scaled down’ subsequently. Now it expects accelerated penetration through 2022, rather than 2020,” the report added. A similar roll-forward of expectations, with a lag, is expected from IT firms as well, according to the report. The report calls for a reality check to the consensus’ anticipation of a material improvement in growth and profitability of IT firms.
Rapid digital transformation has been steering the focus towards IT firms for the last few months. The commentary around the same was upbeat till a few months back. “We acknowledge that as the base increases, growth rates could often be deceptive. However, had cloud adoption post Covid indeed seen a massive and sustainable increase, incremental cloud revenue / backlogs of AWS and Azure should have reported a material spurt over nine months of calendar year 2020,” the report said.
However, ICICI Securities did not dispute the evolution of cloud and digital technologies. “….contrary to consensus, we are sceptical on the prospect of Covid-led material acceleration of this technology change. Hype aside, we estimate at best ~150bps improvement in proforma growth rates of IT over FY22E-FY23E,” they added. Infosys, HCL Technologies, TCS, Mphasis and Mindtree remain the top ‘Buy’ picks for ICICI securities, backed by ‘bottom-up / company-specific investment rationale’.