The Indian stock market is recovering to pre-COVID levels with stocks of certain sectors like pharma, performing better than others. While the banking sector is seeing the bitter effects of the pandemic, analysts have now turned bullish on the IT segment on the potential for an increase in spendings on IT support as businesses expand their online presence to reach customers.
Clear optimism for the IT sector was seen after an optimistic mid-quarter update from HCL Technologies. Guidance from these tech companies has raised their earnings estimates for the current financial year as well as the next year.
Most recently, international brokerage firm Morgan Stanley has raised its target prices on top software exporters by 17-33 percent, which is still 11-14 percent away from their current prices, making them a good bet.
"We believe they can continue to trade at those levels as enterprise IT spending is becoming more mainstream, led by digital transformation and enterprise journey to the cloud, accelerated by the current pandemic," said Morgan Stanley.
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"HCL's mid-quarter update suggests that revenue growth is likely to surprise on the upside for most of the IT companies," said Morgan Stanley in a note.
"We believe the demand environment has held up well and that could support growth recovery - thus lifting multiples as investors gain more confidence," it added.
The brokerage has raised its price target on the stock from Rs 735 to Rs 900 per share, a potential upside of 11 percent from the current market price level.
On 14 September, HCL Technologies had said in a stock exchange filing that it expects the revenue and the operating margin for the current September-ended quarter to be "meaningfully better" than the top end of the guidance it had provided in July 2020.
"The Revenue growth for the current quarter is expected to exceed 3.5% quarter on quarter in constant currency, enabled by broad-based momentum across all service lines, verticals and geographies," it said adding that the EBIT% (earnings before interest and taxes percentage) for the current quarter is expected to be between 20.5 percent and 21 percent.
The stock has risen 94 percent from its March lows and even hit a new record high of Rs 825.10 this week.
Morgan Stanley has a price target of Rs 920 per share on the company from Rs 780 earlier. It is almost 14 percent higher than its current levels. Shares of the company closed 2.66 percent higher at Rs 807.90 apiece on Friday.
Kotak Securities also has a ‘Buy' rating on Tech Mahindra with a target price of Rs 845 per share.
Infosys has gained 90 percent from its March lows, however, considering its strong interactive practice among other Tier-1 IT companies, the company is expected to report growth in the coming quarter especially in the outsourced IT services segment.
Morgan Stanley has raised the price target on the Bengaluru based IT giant to Rs 1,120 from Rs 950 earlier, a potential upside of 11.6 percent from the current levels.
The brokerage expects Infosys to post strong growth for the second quarter and possibly raise its guidance for the current financial year up to 1-3 percent from 0-2 percent currently.