"Most Bullish In A Decade" On Indian IT: Why Some Analysts Are Positive

Domestic brokerage Edelweiss Securities has reiterated its bullish call on the Indian IT sector. India's top IT services company TCS came out with strong fourth quarter earnings last week, propelling the market capitalisation of the Tata group company past $100 billion. Tata Consultancy Services' management also expects a rebound in spending by its key banking, financial services and insurance (BFSI) clients this financial year. Edelweiss Securities believes large Indian IT companies are entering a V-shaped earnings recovery phase.

"Our interactions with a large sample of technologists and industry specialists convinced us that outlook on the Indian IT sector is the 'most bullish in a decade,'" the brokerage said in a report on April 12.

In an April 23 report, the brokerage cites many factors behind its bullishness on Indian IT. "Huge digital-led demand (2) potential margin improvement as digital gains scale and currency tailwind; and (3) consistent buy back. The above factors cumulatively indicate that earnings growth rate can jump almost 3x from a mere 3-5% over FY16-18 to 13-15% over FY21," Edelweiss analysts said in the report.

Digital Scale-Up

Deal signing data, US corporate profits recovery and higher outsourcing from Europe indicate that sectoral revenue acceleration has commenced, Edelweiss said. It expects revenue acceleration to gain steam going forward. "We foresee a structural change in the business with proportion of low-growth legacy business being replaced by high-growth digital business. The scale-up in digital will also mean that inconsistent project flows will become more consistent," Edelweiss said.

Buybacks

According to Edelweiss, top four Indian IT companies have made share buybacks of Rs 43,500 crore over the past one year. It believes that buybacks will become a regular feature for Indian IT companies as well as it is a more efficient way of distributing cash. "Buyback is not an outcome of lower growth or lack of confidence in business; we attribute it to much better capital allocation policies of managements considering significant free cash generation. Buy back is also a more tax-efficient route to distribute cash to shareholders rather than dividend," it says.

Stock Picks

Edelweiss Securities has maintained Infosys, HCL Tech and Tech Mahindra as its preferred picks in the large-cap space. On TCS, Edelweiss Securities said, "Premium valuations restrain us from recommending it in spite of the company's best execution and market leadership."