(Bloomberg) -- With India's biggest technology companies joining their global peers in topping earnings forecasts, analysts are turning extremely bullish on the sector's outlook.
Twelve-month forward earnings estimates for the 50-member S&P BSE Information Technology Index have climbed 4.6% in July, the most since October 2013, according to calculations by Bloomberg. That's after first-quarter net income at four of the nation's five largest IT firms beat even the most optimistic analyst estimate.
India's $181 billion tech industry is benefiting from rising demand for digital services as the coronavirus pandemic hastens the global shift toward automation, with analysts citing strong deal pipelines, upbeat management guidance and cost-cutting measures as reasons to be bullish. Stocks in the sector, particularly Infosys Ltd. and Wipro Ltd., have also witnessed a raft of rating upgrades this month.
“We expect the IT sector's relative earnings outperformance to sustain for the rest of the 2021 fiscal year,” Gautam Duggad, head of research at Motilal Oswal Securities Ltd. in Mumbai, wrote in a recent note. The sector is trading at a “reasonable” valuation given its free cash flow, return ratios and payout metrics, he added.
Read: Nomura Says Outlook for Top Indian IT Firms Improving
July's rise in earnings estimates for the tech-industry gauge has come even as forecasts for the benchmark S&P BSE Sensex Index have been little changed.
Given that, and the global investor frenzy surrounding tech stocks, it isn't surprising to see that the S&P BSE IT index is among the best-performing sectoral gauges in India this year. The measure has surged more than 20% this month, compared with a 9.2% advance in the Sensex.
READ: Infosys Profit Beat Sets It Up for Ratings, Earnings Upgrades
“IT offers relative earnings comfort coupled with solid balance sheet, cash flow, return on equity and payout metrics in such current volatile and disruptive times,” Duggad said.
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