Nomura reiterate positive stance on Indian IT services

Nomura sees 16 - 17% upside in stocks like Infosys, Tech Mahindra and HCL Technologies.

IT stocks which are trading at record highs could see more upsides as per a report by brokerage Nomura. Acceleration in IT spending led by shift to Digital coupled with outsourcing push to drive growth for Indian IT companies. They believe that Cloud to be a near-term beneficiary while digital transformation is a long-term driver.

The brokerage has a target of Rs 1165 for Infosys, Rs 940 for HCL Tech and Rs 930 for Tech Mahindra and recommends buying these 3 stocks.

The analyst is not too bullish on India's largest IT company TCS for which it has a Neutral rating with a target of Rs 2450 and recommends reducing positions in Wipro with a target of Rs 290.

The brokerage report says that acceleration in IT spending coupled with increased push for outsourcing and benefits from market share gains will drive higher revenue growth across the sector.

They have raised their estimates for USD revenue by 1-5% and for EBIT margins by 40-150bps led by benefits from WFH and reduced travel over FY21-23.

COVID-19 has led to a sharp increase in preference for online channels with increase in first-time online users across verticals as well as e-commerce penetration in the US. Push for outsourcing and opportunity to gain market share for Indian IT companies is a key theme of the brokerage report.

Nomura believes that outsourcing trend will accelerate due to 3 reasons: -
1) increasing commoditization of digital, requiring large-scale implementation
2) availability of large digital talent pool
3) existing relationships across clients segments

Lastly, they expect an increasing push for outsourcing given:

1) Stretched client financials

2) Successful demonstration of service delivery through work-from-home and

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3) Potential to leverage capabilities of a service provider for digital transformations, where in-house IT teams are not well equipped.

by Rahul Kamdar