Brokerage firm Motilal Oswal has an overweight on the IT sector and has added HCL Tech to its model portfolio.
"We have been raising IT weights in the model portfolio since 4Q FY20, with the latest revision in July'20. 2QFY21 has seen sustained earnings momentum in IT, resulting in a healthy earnings upgrade for the second consecutive quarter. Management commentaries remained upbeat across the board.
Lastly, a fresh round of dividends and buybacks provides a strong cushion for sustained re-rating, in our view. Therefore, we continue to maintain the overweight stance in the model portfolio, and after the sharp run-up, we now replace Wipro with HCL Tech. We had recently downgraded Mindtree post its stellar outperformance in CY20," the brokerage firm has stated post quarterly numbers from the Information technology companies.
According to the Motilal Oswal report, management commentaries indicate the pandemic has acted as a tailwind for the sector.
"Enterprises are undertaking cloud adoption at a faster pace and digital transformation at the workplace has accelerated, with the strengthening theme of vendor consolidation benefitting the well-entrenched and evolving business models of Tier-I IT.
With business tailwinds and improvements in the deal pipeline, IT continues to offer solid and visible earnings growth with superior FCF generation and continued elevated capital returns via dividends/buybacks. This stands out against the otherwise tepid earnings growth seen in broader markets.
IT management teams have indicated that this may mark the beginning of a multi-year technology upgrade cycle by enterprises, providing decent visibility for the sector's earnings. Thus, we maintain the overweight stance," the brokerage firm has stated.
IT Stocks and their recommendations by Motilal Oswal
Operating margins see sharp expansion:
According to the brokerage firm, operating margins of some Information Technology companies have seen sharp sequential expansion, with Tata Consultancy Services, Infosys, HCL Tech Ltd, Mindtree and LT Infotech reporting 220/360/160/740/440 basis points, year on year expansion.
High-payout policy to continue
With low capex requirements, Tier-I Information Technology firms have increased their payouts in the past five years. Over FY15-20, five Tier-I IT companies returned cumulative capital of Rs 2.1 trillion, Motilal Oswal has noted.
The article is not a solicitation to buy, sell in securities or other financial instruments. Greynium Information Technologies Pvt Ltd, its subsidiaries, associates and the author do not accept culpability for losses and/or damages arising based on information in this article.