Top IT stocks get a thumbs up from Morgan Stanley

Mumbai: Morgan Stanley has raised its price targets on top software exporters by 17-33% to factor in the increase in earnings estimates for FY21 and FY22 following HCL Technologies’ optimistic mid-quarter update on performance. The brokerage prefers Infosys, Tech Mahindra and HCL Technologies, which are trading about 11-14% away from the new target prices.

“HCL’s mid-quarter update suggests that revenue growth is likely to surprise on the upside for most of the IT companies,” said Morgan Stanley in a client note. “We believe the demand environment has held up well and that could support growth recovery — thus lifting multiples as investors gain more confidence.”

The higher price targets, according to the brokerage, reflect better revenue growth rates, change of outlook and assumptions of reduced cost of equity.

Technology stocks have been among the best performers since the stock market rebound from its March lows with the NSE’s IT (information technology) index gaining 77% as against the 51% advance in the Nifty. Analysts said the sector has shown resilience amid the global economic slowdown triggered by the coronavirus pandemic. HCL Technologies shares have risen 94%, Infosys has gained 90% and Wipro has surged 86% during the period.

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“The year started with strong deal flows in the months of January and February, but the impact of Covid-19 on the economy led to a temporary pause in spending as enterprises redrew and re-calibrated their IT spending,” said Morgan Stanley. “This caused a sequential decline in revenue growth during F1Q21, but even then, actual revenue performance turned out to be better than the Street expected.”
HCL Tech, India’s third-largest IT services firm, said in an exchange filing that revenue will rise 3.5% in constant currency in the quarter to September on the back of better execution and growing business from clients in key sectors. Morgan Stanley said the demand environment was strong for the industry. It expects Infosys to post strong growth for the second quarter and possibly raise its FY21 guidance up to 1-3% from 0-2% currently.

After the run-up in the share prices, valuations of large-cap IT stocks are at a premium.

“We believe they can continue to trade at those levels as enterprise IT spending is becoming more mainstream, led by digital transformation and enterprise journey to the cloud, accelerated by the current pandemic,” said Morgan Stanley.

IT stocks had risen on Monday, sending TataConsultancyServices past the 9-lakh crore market value threshold.