IT stocks could surge higher on cos’ strong growth, margin boost

IT stocks could surge higher on cos’ strong growth, margin boost

Mumbai: IT stocks continued their rally on Monday after India’s largest software exporter Tata Consultancy Services (TCS) posted better-than-expected results for the quarter ended December 31, 2020. NSE IT index, which gained 3.6 per cent on Friday, rallied another 3.3 per cent on Monday to hit an all-time high.

Despite rich valuations following a 22 per cent rally in the Nifty IT index over the last three months, IT stocks are likely to continue their march as FY22-23 will be another watershed moment for the Indian IT sector with companies witnessing healthy growth and margin expansion, according to analysts.

“While the sector’s valuation seems rich, it should not be viewed in isolation,” said Debashish Mazumdar, analyst, Edelweiss Securities. “Various aspects such as the macro environment, technology cycle and earnings expectations should be factored in.”

While HCL Technologies rose around 6 per cent Monday, Infosys and Wipro gained 4.9 per cent and 3.8 per cent, respectively. L&T Infotech and Mphasis also rallied nearly 4 per cent each. TCS gained 1.7 per cent.

The Nifty IT index meaningfully outperformed the broader market index since the Covid-19 lows made in March 2020, surging 142 per cent since its lows of March 23 compared with 92 per cent gain in Nifty.

Infosys and Wipro will announce their December quarter numbers on Wednesday. HCL Technologies is set to release the Q3 results on Friday.

Indian IT companies have significantly increased their presence in the new digital world by acquiring capabilities through small company acquisitions, reskilling employees and signing large transformational deals with Fortune 500 companies.

“We expect another round of upgrades, albeit marginal, in revenue estimates for FY22 post December quarter results,” said Kawaljeet Saluja, analyst, Kotak Securities. “IT stocks had a good run, but many have still some steam left. We expect Infosys to lead the industry on growth in FY2022 while Tech Mahindra is a play on margin expansion and 5G opportunities at reasonable valuations.”

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