With the prospects of higher revenue growth in mind, Goldman Sachs has reiterated its buy call for Infosys and TCS while downgrading Mindtree to sell.
In the aftermath of the Covid-19 pandemic, there has been a surge in cloud adoption fueling demand for IT service providers. With the prospects of higher revenue growth in mind, Goldman Sachs has reiterated its buy call for Infosys and TCS while downgrading Mindtree to sell. The rise in demand has benefited Indian IT companies so far and is likely to continue going forward, analysts said. “Looking at Gartner’s cloud forecasts pre and post-COVID, we see that Infrastructure-As-A-Service (IaaS) forecasts have been revised upwards to the tune of 33%, 30%, 39% and 48% respectively for 2021, 2022, 2023 and 2024, pointing to an acceleration of migration to cloud across industry verticals and geographies,” they added.
Growing technology spends
Goldman Sachs said that channel checks done by them suggest that technology demand post COVID has seen a meaningful acceleration led by cloud adoption and the push for digitalization. “There has been increased usage of technology platforms like collaboration tools, enabling virtual sales channel across industry verticals, higher automation tools amid Work From Anywhere trends, cybersecurity to enable remote working for white-collar jobs globally and building of data analytic tools,” they said.
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Further, the global brokerage firm added that the expectations for outsourced IT services spends are forecasted by Gartner to grow at an 8.6% CAGR over 2020-25 and account for 38% of overall enterprise technology spending, versus 33% in 2010 and 35% in 2020.
Stocks to watch
Infosys – Buy
Target price – Rs 2,117
Even though valuations are stretched for the sector, analysts at Goldman Sachs continue to remain bullish on Infosys, keeping the stock on their conviction list. “We expect Infosys to be the fastest-growing large-cap IT company in FY22E with CC USD revenue growth of 18%,” they said. Infosys, with its strong sales and marketing team for digital products, has managed industry-leading deal win momentum. The stock currently trades at 26.7X FY23E P/E for FY21-23E EPS CAGR of 19% against the Indian IT sector trading at 30.9X FY23E for FY21-23E EPS CAGR of 18%. The target price set by Goldman Sachs implies a 25% upside from current levels.
TCS – Buy
Target price – Rs 4,578
Tata Consultancy Services is another stock that Goldman Sachs is bullish on. The brokerage firm said that there are several factors that could help TCS add to its market share. These include its strong domain expertise, contextual knowledge, wide set of digital capabilities, large scale with presence across diverse geographies and industry verticals, market leadership with a wide scope of services being offered which helps in stitching together large deals, and vendor consolidation. “TCS looks undervalued on both sector-relative P/B vs. RoE as well as EV/GCI vs. CROCI/ WACC frameworks,” they added. The target price of Rs 4,578 per share translated to an upside of 21.4% upside.