Shares of information technology (IT) companies were on a roll at the bourses on Monday, after Tata Consultancy Services (TCS) announced share buyback plan amid expectation of strong earnings in the July – September quarter of the current fiscal (Q2FY21). And if analysts are to be believed, IT stocks still have more steam left.
At the bourses, the Nifty IT index hit a record high of 20,748 in intra-day trade on Monday, up 2.8 per cent at 20,677. In comparison, the Nifty50 index gained 1.2 per cent on the NSE. Among stocks, TCS surged 6 per cent to hit a record high of Rs 2,667, surpassing its previous high of Rs 2,554 touched on September 22, 2020. The Tata group IT bellwether said it will consider a buyback on Wednesday, October 7, 2020. TCS' market capitalisation surged past the ₹10 trillion mark for the first time on Monday. In the process, the Tata group company became the second Indian firm after Reliance Industries (RIL) to achieve this milestone.
Wipro, too, surged 6 per cent to Rs 330.55 in intra-day trade on Monday, hitting over 20-year high on the NSE. The stock was trading at its highest level since February 22, 2000, when it hit an all-time high of Rs 388.12 in intra-day deals.
“TCS’ buyback will serve two purposes. One, it is a way of rewarding shareholders. Second, Tata Sons will be able to generate money via the buyback offer. If this comes at a substantial premium, one can tender shares,” advises G Chokkalingam, founder and chief investment officer (CIO) at Equinomics Research.
During Q2FY21, the BSE IT index – up 31.7 per cent – significantly outperformed the S&P BSE Sensex, which gained 9.2 per cent, data show. Amid the pandemic, say analysts at IDBI Capital, the IT sector has seen good pick-up in demand for digital solutions resulting in improvement in growth outlook for most of the companies within the sector. The optimism over the months also stemmed from the encouraging management commentary by Accenture as well as HCL Technologies’ (HCL Tech’s) mid-quarter upward revision in revenue and earnings before interest, and tax (EBIT) margin guidance. Cost rationalisation, lower travel cost, and cross-currency benefits, according to analysts, are also expected to drive operating margins of the companies in Q2FY21.
“Acceleration in IT spending coupled with increased push for outsourcing and benefits from market share gains will drive higher revenue growth across the sector. We raise our estimates for USD revenue by 1-5 per cent and for EBIT margins by 40 – 150 basis points (bps), led by benefits from work from home (WFH) and reduced travel over FY21-23F. Hence our EPS estimates are up 1 – 16 per cent across Tier-1 IT over FY21-23F,” said Rishit Parikh, an analyst tracking the IT sector at Nomura.
Those at IDBI Capital forecast revenue growth between 1.7 per cent and 3.9 per cent quarter-on-quarter (QoQ) in constant currency (CC) terms for the large-cap IT universe, with HCL Tech likely to outperform. “We forecast TCS to report the best improvement in EBIT margin,” wrote Urmil Shah and Jayalaxmi Gupta of IDBI Capital in an October 4 note.
Mindtree, KPIT Technologies, Info Edge (India), Coforge and Birla Soft also hit their respective record highs on the National Stock Exchange (NSE) on Monday. NIIT, Mastek, Ramco Systems, Wipro, Aptech and Tata Exlsi gained in the range of 4 per cent to 7 per cent.
As in investment strategy, Chokkalingam advises those who are already invested in IT stocks to stay put. “Those looking to enter now can buy stocks that are trading at 12 – 14x FY22 price-to-earnings (PE) in the large-cap segment, or where enterprise value to revenue is around 1.5x in the midcap segment,” he says.
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