The IT sector is enjoying a good run in the wake of the Covid-19 pandemic as dependence on technology has grown and the demand scenario looks robust.
IT majors TCS, Infosys and Wipro have released their June quarter scorecard in the last few days.
TCS reported a consolidated profit of Rs 9,008 crore for the quarter ending June 2021, registering a 2.6 percent sequential decline due to lower other income, and missing analysts’ expectations.
On July 14, Infosys reported a consolidated net profit of Rs 5,195 crore for the quarter, growing 2.3 percent sequentially.
The next day, Wipro reported a consolidated net profit of Rs 3,242.6 crore, up 35.7 percent year-on-year (YoY) and 9 percent quarter-on-quarter (QoQ).
Infosys and Wipro numbers cheered investors and both stocks hit their 52-week highs after their Q1 results. However, TCS appears to have failed to impress the market. The stock has been under selling pressure since its June-quarter results.
Global financial firm Citi gave a sell call on TCS after its Q1 numbers with a reduced target price due to lower-than-expected revenues. The weakness in the India business was expected, it said.
The brokerage said the stock’s valuation was high at FY20-23 EPS (earnings per share) CAGR estimate of 7 percent.
Analysts prefer Infosys to Wipro & TCS
While analysts are positive on all the three from a long-term perspective, they seem to prefer Infosys to Wipro and TCS for the short to medium term.
“My favorite is Infosys, and I believe investors should keep a higher weightage of their portfolio invested on Infosys. Infosys’ growth was very consistent over the last 15 quarters, and the revenue growth of 4.5 percent in the previous quarter is among the top quartile performance among the last 15 quarters,” said Ashis Biswas, Head of Technical Research at CapitalVia Global Research.
Biswas expects the connected systems on the cloud will produce massive amounts of data and data analytics and AI-driven automation will be the next big growth engine for the company.
TCS management remained positive on growth prospects for FY22. Infosys management raised its FY22 revenue growth guidance to 14-16 percent from 12-14 percent, while Wipro management guided for a 5-7 percent QoQ dollar revenue growth for Q2 post the 12.2 percent QoQ revenue growth in Q1FY22, Jyoti Roy- DVP- Equity Strategist, Angel Broking, said.
“While we continue to remain positive on the IT sector, given the strong demand environment, Infosys continues to be our top pick in the large-cap IT space, given continued large deal wins and reasonable valuations followed by Wipro and TCS,” said Roy.
Deepak Jasani, Head of Retail Research, HDFC Securities, also prefers Infosys. “In terms of upside potential, Infosys, TCS and Wipro—in that order—are the preferred stocks in the IT space based on their Q1FY22 results and guidance,” said Jasani.
“Wipro has caught up to a large extent on earnings and valuation differential after the improvement in their numbers over the past few quarters. Infosys has positively surprised the street by raising its revenue guidance for FY22. TCS continues to show strength in core segments despite the Q1 miss on India revenue and continues to gain market share,” said Jasani.
Rajesh Palviya, VP – Technical and Derivative Research, Axis Securities finds Infosys and Wipro attractive in the near term setup.
“Infosys may scale up towards Rs 1,660-1,680 in the short term; Rs 1,520-1,480 are likely to act as strong support in the near term,” he said.
“The chart pattern of Wipro suggests that we can see another 5-8 percent up move in the stock towards Rs 630-660 in the near term while Rs 550-535 may act as good support on the lower side,” said Palviya.
Rajesh Palviya, VP -Technical and Derivative Research, Axis Securities, finds Infosys and Wipro attractive in the near-term setup.
“Infosys may scale up towards Rs 1,660-1,680 in the short term, Rs 1,520-1,480 are likely to act as strong support in the near term,” he said.
“The chart pattern of Wipro suggests that we can see another 5-8 percent up move in the stock towards Rs 630-660 in the near term, while Rs 550-535 may act as good support on the lower side,” said Palviya.
IT sector teeming with positivity
IT sector is enjoying a dream run in the wake of the Covid-19 pandemic as the dependence on technology has grown and the demand scenario looks robust.IT firms have report healthy growth in banking financial services and insurance (BFSI), healthcare, retail, and manufacturing segments while there is increased demand for digital transformation, cloud migration,
artificial intelligence, the internet of things, blockchain, etc, experts point out.
“The backlog of orders and deals has increased much better, leading to a larger upgrade in the outlook for the sectoral players. This is leading to an upside in earnings forecasts and stock target price due to a rise in ratings and valuations,” said Vinod Nair, Head of Research at Geojit Financial Services.”The sector is likely to outperform the market in the short to long-term basis. Investors can increase their exposure in this defensive and high-quality sector, in such a highly valued market, by buying into branded
large and mid-caps IT companies,” said Nair.
The Nifty has jumped 104 percent, while Nifty IT has surged 148 percent since March 2020 lows.
“The sector is in a re-rating cycle and this trend is likely to persist over the medium term,” said Palviya.
“The information technology space is marked by companies having strong balance sheets and playing on the current trend of digitisation. Even at the current levels, the IT sector valuations are reasonable. Thus, we recommend an overweight stance on the sector,” he said.
Disclaimer: The views and investment tips expressed by experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
