IT stks factor in most positives; pay hike, promotion surprising: Analysts

'New era' for IT companies as they do better than other sectors in the coronavirus pandemic.

The announcement of a salary hike and promotions across the-board by Infosys on Wednesday and earlier by Tata Consultancy Services (TCS) have come in as a surprise for analysts. While announcing its financial performance for the September 2020 quarter of the current fiscal (Q2FY21), Infosys said it will roll out salary increases and promotions across all levels, effective January 1. The company also said it will give 100 per cent variable pay along with a special incentive for Q2.

“This is the start of a new era for information technology (IT) companies. Things are definitely going right for them for now. Covid-19 pandemic has boosted their digital business segment and this is likely to remain the case going ahead as well. The optimism is reflected in Infosys upping the revenue guidance for financial year 2020-21 (FY21) to 2-3 per cent from the earlier 0-2 per cent,” said A K Prabhakar, head of research at IDBI Capital.

And the numbers do support this view, At Infosys, for instance, digital revenues as percentage of total revenues jumped to 47.3 per cent in Q2FY21 versus 38.3 per cent YoY and 44.5 per cent QoQ. For Infosys, the digital services comprise of service and solution offerings that help their clients leverage AI-based analytics and big data, engineer digital products and Internet of Things (IoT), modernize legacy technology systems, migrate to cloud applications and implement advanced cyber security systems.

“The IT companies have relatively done better than the other sectors during the Covi-19 pandemic and hence a salary hike / promotion is justified. Though it comes as a surprise, it will go a long way in boosting employee morale,” said G Chokkalingam, founder and chief investment officer at Equinomics Research.

Barely a few days ago, TCS had made a similar announcement while announcing its Q2FY21 numbers, where it unveiled plans of hiking salary of its employees effective October 1. With the pandemic-induced changes to consumer lifestyle and preferences, analysts say though the technology sector will witness continued growth in the near-term due to strong demand for Cloud / digital services, most frontline IT stocks, however, price in most positives at the current levels.

“For the short-term, most positives are priced in. That apart, the buyback plans of TCS and Wipro will keep a lid on their respective stock prices. That said, they do appear as good investment options from a long-term perspective,” Prabhakar says.

Those at ICICI Securities, too, are concerned about the near-term prospects and suggest the euphoria around cloud and digital business segments needs a reality check. That said, for bottom-up investors, the sector does present interesting opportunities of growth / profitability improvement led by micro factors.

“‘Cloudification’ and ‘Digitalisation’ had almost become synonymous with Covid-19. Expectations of a material and permanent increase in growth / profitability of the industry factor-in aggressive assumptions around incremental monetisability of these technologies. Hype aside, our analysis suggests Covid-19 can at best drive around 150 basis point (bps) growth acceleration over FY22-FY23,” wrote Sudheer Guntupalli and Hardik Sangani of ICICI Securities in an October 6 co-authored note.