ICICI Direct Update - IT: IT on the cusp of multi-year transformation phase...

Rising adoption of smartphones, high internet speed and social distancing (due to Covid-19) has changed consumer behaviour. Consumers now prefer to transact (buy a product) virtually over the smartphone via an app instead of physical transaction. This has led to virtualisation of business models. In addition, to keep business up and running in a work from home scenario, technology is gaining traction. As a result, new age technologies like cybersecurity (to protect business from work from home scenario), app development (to help customer transact virtually) and Cloud (to enable seamless & efficient online transaction) are witnessing robust growth. We expect technology to become an integral part of a company's spending and key to revenue growth. Hence, we expect increased allocation towards technology making IT companies indispensable to business. Digital technologies like cloud, cybersecurity, AI, Analytics are expected to play a critical role in driving this growth.

Valuation & Outlook

Considering the robust growth in new age technologies, we expect top five IT companies to register double digit growth in revenues (on average basis) in FY22E and FY23E. This, coupled with higher offshoring and cost rationalisation, will help IT companies maintain stable margins in FY22E & FY23E (albeit above FY20 levels). Hence, we maintain our positive view on the sector. We maintain BUY on TCS and Infosys considering their ability to provide end to end solutions. Further, considering robust opportunity in cloud, ER&D and 5G we maintain BUY on HCL Tech and Tech Mahindra. Among midcaps, we prefer Zensar and Mastek based on attractive valuation.

For details, click on the link below: https://www.icicidirect.com/mailimages/IDirect_IT_SectorUpdate_Dec20.pdf

Source : Equity Bulls

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