Top Indian information technology companies such as Infosys, Wipro, HCL Technologies, and others have refused to go down the path of earnings downgrade as healthy deal wins helped business growth. In the first quarter of this fiscal, Indian IT companies have exceeded expectations, resulting in material earnings upgrades, said a report by brokerage and research firm Motilal Oswal. “Key positives include healthy deal wins, a robust deal pipeline and better-than-expected guidance for the financial year 2021,” the report said. The IT sector has the potential to act as a safe haven in these volatile times, with Tier-I IT companies having relative earnings comfort coupled with strong balance sheets, and cash flows.
So far in this earnings season, top IT companies like Infosys, Wipro, and HCL Technologies indicate that the business disruptions for the sector have not been as bad as earlier expected. Motilal Oswal estimated a 49% earnings decline in the first quarter, however, the robust results have outperformed the expectations. “This is impressive given the sharp earnings volatility seen in other sectors due to the COVID-19 pandemic induced lockdowns and consequent demand-supply disruption,” the report said. The brokerage firm has increased its portfolio allocation in the IT sector by increasing weightage by 100 basis points in Infosys and adding Wipro to the portfolio while trimming its position in utilities.
Although the Nifty has staged a smart recovery from March lows, it is still not recouped from all losses. Nifty IT, on the other hand, has outperformed the Nifty by 20% year-to-date. “IT seems relatively well-poised given the better earnings visibility coupled with the comfort of balance sheets, FCF, return ratios, and payouts,” Motilal Oswal added. While the Nifty IT index has gained 10% the benchmark Nifty 50 has declined 9.4%, year-to-date.
Another reason why IT companies emerge as an attractive option is their overly generous attitude towards investors in the last five years. TCS, Infosys, HCL Tech, Wipro, and Tech Mahindra, the top five IT giants in India earned a total of Rs 3.3 lakh crore in profits between financial year 2016 and 2020, of which a massive Rs 2.3 lakh crore was paid to the shareholders. Motilal Oswal has a BUY rating on HCL Technologies, Infosys, L&T Technologies, and Mindtree, while being Neutral on TCS and Wipro.