IT shares in demand ahead of Q3 results; TCS, Infy, HCL Tech hit new highs

Analysts at Motilal Oswal said the multiple mega deal wins in Cloud and Captive should add incremental growth to the sector's already buoyant organic growth momentum

Shares of information technology (IT) companies continued their northward march with the Nifty IT index hitting fresh record high on the National Stock Exchange (NSE) on Monday, as the sector kick starts its October-December quarter (Q3FY21) earnings from the current week.

Tata Consultancy Services (TCS) and Larsen & Toubro Infotech (LTI) were up 2 per cent at Rs 2,988 and at Rs 3,769, respectively, hitting new highs on Monday. Infosys, HCL Technologies, Wipro, and Tech Mahindra, too, were trading at their respective fresh record highs on the NSE.

At 10:18 am, Nifty IT index was up 1 per cent, as compared to 0.54 per cent rise in the benchmark Nifty50 index. The IT index hit a new high of 24,785 points in intra-day trade.

The sector giant, TCS is scheduled to announce its Q3FY21 results on Friday, January 8, 2021. The board will also consider declaration of a third interim dividend to the equity shareholders.

The recent commentary from both large- and mid-cap IT Services companies during their annual investor meets (Infosys, Wipro, LTI, etc.) point to continued optimism on their calendar year 2021 (CY21) growth outlook, even after adjusting for a low base year on year (YoY).

Motilal Oswal Securities expects this optimism to be echoed by other managements during the Q3FY21 earnings season. Healthy order pipeline, large deal signings, strong earnings from Accenture, and absence of headwinds like a repeat of the COVID-19 led lockdown in Q1FY21 or uncertainty with regard to the outcome of the US Presidential election should drive the outperformance in 3Q v/s management guidance in 2QFY21, the brokerage firm said in technology Q3FY21 preview.

The multiple mega deal wins in Cloud and Captive (TCS – Postbank and Pramerica, Infosys – Rolls Royce and Daimler, and Wipro – METRO AG) should add incremental growth to an already buoyant organic growth momentum, it said.

Rising adoption of smartphones, high internet speed and social distancing (due to Covid-19) has changed consumer behaviour. Consumers now prefer to transact (buy a product) virtually over the smartphone via an app instead of physical transaction. This has led to virtualisation of business models. In addition, to keep business up and running in a work from home scenario, technology is gaining traction, according to analysts at ICICI Securities.

Considering the robust growth in new age technologies, the brokerage firm expect top five IT companies to register double digit growth in revenues (on average basis) in FY22E and FY23E. This, coupled with higher offshoring and cost rationalisation, will help IT companies maintain stable margins in FY22E & FY23E (albeit above FY20 levels), it said.