The upside in information technology stocks has not yet peaked, even after the strong bull run in these shares for almost a year now.
TCS, Infosys, Wipro, HCL Technologies, Tech Mahindra and other bluechip IT shares will likely beat consensus analyst estimates, given the accelerating technology spends across the globe is aiding revenue growth and margin expansion for the industry. The upside in information technology stocks has not yet peaked, even after the strong bull run in these shares for almost a year now, Edelweiss Securities said. The global IT industry could be staring at a $1 trillion opportunity in cloud sales, of which $175 billion could flow into Indian IT firms, the brokerage firm said a recent research note. “We believe based on our several interactions with global technologists/hyper scaler experts that cloud sales of hyper scalers can lead to 3 times services revenues spread over next 5-6 years,” Edelweiss said.
Top IT stocks to buy
Analysts at Edelweiss said that their entire coverage universe in the IT space is well placed while advising investors to not hunt for multi-baggers while ignoring stronger players. “We don’t have a negative view or ‘REDUCE’ on any stock in Indian IT under our coverage, and strongly believe that each company in the sector stands to gain from the powerful tailwind that continues to strengthen,” the note said. The IT industry is estimated to grow 16-17% CAGR over the next few years.
Here are Edelweiss’ calls on most popular IT stocks:
- Tata Consultancy Services: ‘Buy’; Target Rs 4,176; Upside 36%
- Infosys: ‘Buy’; Target Rs 2,124; Upside 59%
- Wipro: ‘Buy’; Target Rs 550; Upside 27%
- HCL Technologies: ‘Buy’; Target Rs 1,616; Upside 67%
Tech Mahindra, LTI, LTTS, and Mindtree are also among Edelweiss’ top picks.
Client spends on cloud increase
Client spends are increasing, owing to higher cloud adoption across industries and geographies; substantial jump in tech spends led by BFSI’s renewed propensity to spend; sharp bounce-back in manufacturing and product engineering services; and retail refocusing on core infrastructure as well as digital, the note said. “Also, most CTOs have shown extreme urgency to make the first move to the cloud, reflected in hyper scalers’ revenues,” Edelweiss said citing interaction with the IT industry. However, the second wave of the coronavirus has kept implementation slow.
Runaway revenue growth, margin expansion on cards
With the improvement in client spends, margins for leading companies in the space are pegged to improve by 250-350 basis points in the next three years over the previous fiscal levels. But the consensus forecasts are still building in revenue growth and margins much lower than what companies themselves are indicating. “This reality-consensus mismatch again raises the odds of a big outperformance in the fourth quarter (barring the currency risk), akin to the preceding three quarters and of 10-15% quick potential returns by IT stocks over and above their roaring gains since May,” it said.
How margins will expand
Margin improvement is expected to be helped by sustained moderation in subcontractor costs, stable wages, and lower skilling costs. “We reiterate — again enthused by emerging and reassuring evidence — that the mega technology upcycle has just gotten underway. IT companies across the board have started acknowledging that margin improvement is more structural than they anticipated earlier,” the report said. The global outsourcing market is worth $200-250 billion and the Indian IT services sector has been consistently gaining market share by 1-2% over the last several years, with its share now standing at nearly 70%.
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