The shares of Indian Information Technology (IT) companies reversed their earlier losses in the day and ended 0.75 per cent higher at the close of the market. The reversal in trend was based on a cue taken from the robust performance posted by the international bellwether outsourcing company Accenture.
The Nifty IT Index ended the week at 25,563 against the previous close of 25,373.35, a gain of 189.65 points. The change in sentiments toward IT stocks was such that, during the day all the constituents were trading in red along with the broader market but towards the end, with Accenture’s Q2 numbers trickled into the market, 9 out of 10 stocks ended in green with the lone loser in Tech Mahindra declining 1.25 per cent at Rs 987.50.
Accenture's revenue beat, bookings at historically high, and improvement in demand trends even in stressed verticals were among the key highlights from its second-quarter show which analysts believe could lend optimism to the fourth-quarter performance of Indian techs.
Accenture’s strong Q2 performance and a second-time upward revision in FY21 revenue growth guidance (from 2-5 per cent in early FY21; 4-6 per cent at Q1-end) reflect strength in demand, particularly in outsourcing. A broad-based demand recovery and sustained growth momentum in revenue/order booking of the outsourcing business augur well for Indian IT peers.
The Nifty IT index rose around 9 per cent, 28 per cent, 116 per cent in the last 3, 6, and 12 months respectively. A strong demand environment, sustained acceleration in revenue growth, and robust order booking should support higher valuations. “We prefer Infosys Technologies, HCL Technologies, and Tech Mahindra among Tier 1 companies,” Emkay Global Financial Services said in its client note.
JM Financial in its commentary on Accenture’s earning numbers and its impact on the Indian IT sector said, “Accenture reported exceptionally strong bookings, with total bookings at $16 billion, a growth of ~13% YoY despite the very strong bookings seen in 2QFY20. Moreover, the outsourcing book/bill ratio at 1.4x continues to trend above the long-term historical average, and we believe this could reflect in strong order bookings for the Indian techs as well.”
Despite the limited read-through in general, the upward revision of its guidance, strong double-digit growth in cloud, and the strong order bookings, with outsourcing book/bill remaining higher than long term historical average, should lend confidence to the growth resilience of Indian techs going into FY22, JM Financial said.
The strong bookings are in line with our channel checks, where peers such as TCS and Infosys have suggested strong demand uptick driven by cloud migration and other digital transformation initiatives.
"Infosys continues to be our top pick amongst Tier-I techs, while Persistent Systems and Mphasis are our preferred picks in Tier-II techs," the JM note said.
The strong hiring (about 22k+ net addition in 2QFY21), along with the provision of one-time bonuses could suggest increased demand for resources with niche skills, and as such supply side would be a key thing to watch out for, especially for Tier-II techs. JM Financial said, “However, we believe any supply-side constraint would be more of a 2HFY22 phenomenon.”
