IT Index Up 27% YTD: Here's Why Brokerages See Further Upside

Nifty IT index on a year to date basis has recorded a sharp surge of 27 percent in comparison to a fall of 8% on the benchmark Nifty index during the same time.
Among individual stocks from the space, all but one rallied led by Mindtree that posted gains of 65% while others including Tata Elxsi, HCL Tech, Infosys, Coforge, Wipro jumped between 28-55 percent during the same period.

Even today (September 30, 2020), the index is up over 1% despite just 0.33% gains on the Nifty index.

Much of the recent gains in the domestic IT stocks are buoyed by hopes of a fresh US stimulus. On Tuesday, US House Speaker Nancy Pelosi iterated that she is hopeful that another round of the US coronavirus stimulus will be decided with the White House this week.

Moreover the sector's outperformance this year is largely driven by healthy deal wins, deal pipeline, margin recovery as well as good revenue guidance for the upcoming quarters.

Brokerages anticipate the upward momentum to likely continue for the sector. Edelweiss Securities holds the view that Covid 19 pandemic has boosted the demand for hi-tech and has shriveled human activity into a world of apps. The explosion in online activity has galvanised massive cloud-led adoption, digital adoption and transformation of the core, added the broking firm.

Also, it pointed that Indian IT stocks are trading at a huge discount of 20-60 percent to their fair market value and 50 percent to global counterparts and this variance shall correct over a period of 2-3 years.

Edelweiss Securities picks from the sector include:
1. From large cap- HCL Tech, Infosys, TCS and Tech Mahindra in the specified order
2. Mid caps- Mindtree, L&T Tech and L&T Infotech
3. Small cap IT stocks - Eclerx, Cyient and Persistent

Also, Jefferies in a recent report said that tech spending is becoming an integral part of businesses thereby augmenting the scope of IT services. The report cited takeaways of a call with Vikas Jain, MD and Partner, BCG.

"Mr Jain highlighted that Indian IT firms are likely to continue gaining market share, albeit at a slower pace, owing to their higher base. This would be driven by the high level of agility and entrepreneurship exhibited by them to adapt to the changing market dynamics. Indian IT firms with strong downstream capabilities continue to find a good share of deal volumes. In the medium to long term, Indian companies will need to adapt to changing technologies. This is particularly crucial given growing competition as players try to capture more of the tech value chain.," the report clarified.

Some demand contraction is anticipated by the firm amid the pandemic, nonetheless digital spending will gain pace owing to increasing adoption of cloud as well as offshoring, added the brokerage. Also, it asserts that cloud is net positive for IT services and IT players in the country shall continue to gain market share spurred by the entrepreneurial enthusiasm.

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