Nifty IT index, TCS, Infosys hit fresh highs this week; IT sector set for re-rating ahead



Key Highlights

  • Demand environment strong. IT sector to see robust deal momentum, strong cash flows & profits
  • IT stocks reasonably priced, expect IT stocks to trade in the range of 30-40 Price-earnings multiple
  • IT sector may see similar re-rating as seen in consumer stocks during 2009-14

Its festive cheer for the IT sector this week as Nifty IT index scaled fresh record highs. This week saw TCS, Infosys, HCL tech, LTI, Persistent systems, Mphasis and quite a few other stocks hit fresh highs. Deal momentum has only intensified for the sector as Infosys and Wipro announced large strategic deals during this week.

Infosys signed a large strategic deal with automotive major Daimler and Wipro signed a large deal with Metro AG this week which led to the stocks scaling fresh highs. Last month saw TCS announcing a large deal with Deutsche Bank and for Infosys, this was another large deal after Vanguard which was signed during July 2020.

Post the Covid-19 pandemic, companies across industries and geographies are trying to figure out how to conduct business in the new normal and this has led to accelerated demand for digital transformation with the need for technology adoption only going up manifold said Vikas Khemani, Founder, Carnelian Capital Advisors in an exclusive interview to ET NOW.

He said, IT sector is one sector where Indian companies have no global competition, delivery happens from India and within this also we have about 10-15 meaningful companies that will cater to this demand.

Vikas believes, whenever demand environment is robust, competitive intensity is low then companies deliver better margins and better returns. IT sector does not require a lot of capital to be deployed and they deliver high cash flows. Deal momentum is likely to grow stronger for the IT players going ahead as companies across industries and geographies increase spend on technology. This will lead to large IT players focus on bagging large deals and some of the mid-small IT players will grow big. Double-digit growth for the IT sector is realistic for the next 3-5 years.

Expect IT sector to be one of the star performers for the Indian capital market over the next 3-4 years, said Vikas. He believes that, a very large part of the portfolio should be deployed in the IT sector as the IT sector is ripe for re-rating. IT sector is similar to the consumer sector at the moment with risk-reward for the sector being good, downside shock is limited and companies throwing strong cash flows.

Vikas believes most IT stocks will trade in the range of 35-40 PE (price-earnings multiple) and sees IT stocks to be reasonably priced as of now. IT sector may see similar re-rating as seen in consumer stocks during 2009-14 and market correction should be seen as an opportunity to buy into IT stocks.

IT companies have strong cash flows and they do buybacks. So the floating stock available for these companies is reducing this coupled with robust profits & strong cash flows which will lead to re-rating of the sector, said Vikas.

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