The recent rally in the IT index has been driven by better than expected earnings results in terms of revenue, margins, deal wins and strong management commentary by the firms. After the June quarter earnings, global brokerage house, Goldman Sachs increased FY22-23 sector revenue and earnings forecasts by up to 7 percent and now forecasts 12.6 percent dollar revenue growth in FY22 for the top 5 Indian IT firms.

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"While cyclically the momentum remains strong for Tech services going into FY22E, even strengthening, we believe a number of structural tailwinds are emerging—including the scaling up of digital projects with the modernization of IT stacks for more robust business continuity planning," Goldman Sachs said in the report.

The brokerage sees TCS as one of the largest beneficiaries of these trends given its wide array of services/ capabilities, geographic presence, wide client base, and consistent strong execution.

TCS underperformed Nifty IT by 18 percent over the last 3 months due to weak results in June driven by the negative impact of COVID-19. The brokerage now sees most negative news as largely priced in with improving demand commentary from the management and better revenue trends emerging for banking/retail verticals.

It expects TCS to see a sharp improvement in margins over its peers in the near term and hence, has revised its 12-month target price to Rs 2,598, up 26 percent from the earlier target. It implies a 16 percent potential upside in the stock.

It reiterates 'buy' rating on Infosys and expects 23 percent upside to Rs 1,165 and on TechM it expects a 32 percent upside with a target price of Rs 954. It also upgrades HCL Tech to 'neutral' with a new target price of Rs 767 per share, up 50 percent from the earlier target.

Goldman Sachs also believes India IT services companies are positioned favorably to benefit from a third wave of outsourcing after previous waves in 2000 and in 2008-09. In the past, major crises have tended to lead to a sharp increase in outsourcing and even offshoring, particularly to India.

Goldman Sachs noted that the first such wave happened after the Y2K problem in 2000 when India’s IT industry was growing at over 40 percent from a small base and very low global penetration, driven largely by labor cost arbitrage. The second wave started post-GFC in 2008-09 when India’s IT industry grew at less than 15 percent consistently for three to four years before the growth normalized to high single digits.

Post COVID-19, it expects a third wave of outsourcing and an increasing number of technology roles globally finding their way to India as Work From Anywhere becomes the new accepted norm.

First Published:Aug 28, 2020 4:15 PM IST