IT shares trade firm in a weak market; Cyient hits 52-week high, LTTS up 9%

Shares of information technology (IT) companies were trading firm in an otherwise weak market with Cyient hitting fresh 52-week high, while L&T Technology Services (LTTS) ralling 9 per cent on the BSE in the intra-day trade on Wednesday. At 10:02 am, the S&P BSE Sensex was down 0.71 per cent or 344 points at 48,004.

Shares of Cyient surged 13 per cent to Rs 647, zooming 28 per cent in the past three trading days, after the company's management said it expects sequential improvement in margins in the January-March quarter (Q4FY21) driven by increase in volume and improvement in operational efficiencies. Going forward, the company expects healthy QoQ growth in Q4FY21, mainly led by traction in services and design-led manufacturing (DLM) business.

Meanwhile, LTTS rallied 9 per cent to Rs 2,550 in the intra-day trade today after parent-firm L&T posted better-than-expected Q3 results on Monday, January 25, post market-hours. The company said its IT and Technology Services Segment achieved customer revenue of Rs 6,505 crore during the quarter ended December 31, 2020, registering a YoY growth of 7 per cent.

"The Ebitda margin for the segment increased to 25.5 per cent for the quarter ended December 31, 2020 as compared to 21.0 per cent of the corresponding quarter of the previous year, attributed to higher revenues, improved manpower utilisation and lower operational costs," it said in a statement. 

Brokerage firm Motilal Oswal Financal Services has initiated coverage on the stock with a 'Buy' rating and target price of Rs 2,830, based on 26x FY23E EPS, 5 per cent premium to its target multiple for L&T Infotech. The brokerage firm believe that the structurally superior industry growth outlook and higher earnings growth (30 per cent over FY21-23E) justifies LTTS' premium multiples.

"As one of the largest pure play R&D outsourcing vendors out of India, we see LTTS as a key beneficiary of growing tech adoption across R&D and new product development. More importantly, with Digital revenue share of around 50 per cent, it would benefit from high double-digit growth in global Digital ER&D spend (18 per cent CAGR over 2018-23E)," it said. The stock of LTTS hit a record high of Rs 2,780 on January 15, 2021.

Among other IT stocks, Tata Elxsi, Larsen & Toubro Infotech, Wipro, Cigniti Technologies, Ramco Systems and Tech Mahindra were up in the range of 2 per cent to 6 per cent in an otherwise weak market.

"The IT sector's performance over the past year has been outstanding; the sector has deservedly been re-rated – companies have paid out more than 85 per cent of free cash flow (FCF) to shareholders, had net-cash balance sheets, and commands RoEs of 25–40 per cent. We have run a material overweight (OW) position on IT in Model Portfolio since 2020 and continue with a ~210 basis points (bps) OW position with Infosys and HCL Tech as top ideas in Tier-I IT & Mphasis and Persistent in Tier-II," MOFSL said in sector update.