Shares of India's software services providers are on track to log their best month since December as demand for digital services continues during the pandemic.
The Nifty IT index is up 11.4% so far this month compared to the Nifty's 4.7% gain. The gauge is set for its best month since 11.4 gains in December. The index had surged 22.5% in July last year on digital push by clients during the first lockdown.
Clients continue to boost digital spending as the pandemic accelerated online shift. But that's the not the only driver.
According to a note by Kotak Institutional Equities, IT companies will also benefit from an increased spending on global engineering, research and development, driving growth after a modest 2020.
HCL Tech Ltd., TCS Ltd., Wipro Ltd., Infosys Ltd., Accenture and Capgemini are the best placed to cash in on this. L&T Technology Services Ltd. is also well positioned, being the largest pureplay engineering, research and development service provider in India, Kotak said.
L&T Tech has strong capabilities in digital engineering which constitutes 53% of revenues, the report said. It has a rich client base that includes 53 of top 100 global ERD spenders, and its offers services for multiple verticals, and is proactive in shaping large deals, Kotak said.
While TCS and Infosys have benefited from large deals in recent years, Kotak said HCL Tech has a strong R&D heritage and derives 15% of revenues from ERD, it said.
"Competition is intensifying in the space, which is not a surprise," Kotak said. "IT services providers are addressing these opportunities leveraging their strength in analytics, cloud, artificial intelligence and machine learning."
Bernstein is bullish on IT bellwether TCS. Citing a "strong billion-dollar playbook" and "best supply-side engine", the researcher called it 'Bernstein Best Idea' for the third quarter of 2021 (three months through September).
Covid-19 has accelerated a multi-year technology cycle led by cloud and digital transformation and TCS is "best positioned in this cycle with proven ability to win billion-dollar deals, strong platform capabilities & best in class execution", it said.
TCS missed revenue estimate for the quarter ended June. But Bernstein attributed it to a "onetime impact in India", calling it "revenue delayed, not lost".
TCS' margin execution has been good despite strong hiring, increase in wages and the impact from the India business, it said. "TCS deserves a premium valuation and we view TCS as a core long-term holding, strong earnings compounder and maintain leadership positioning."
The research firm rated it 'outperform' with a target price of Rs 4,050, a potential upside of 17%.
Essential Business Intelligence, Continuous LIVE TV, Sharp Market Insights, Practical Personal Finance Advice and Latest Stories — On NDTV Profit.
