TCS, Infosys, HCL Tech to Wipro - how much will Indian IT industry grow, or will it? Find out

TCS, Infosys, HCL Tech, Wipro growth outlook: Kotak Institutional Equities expects the Indian IT industry to grow in double digits in FY2022E with select large players growing up to 12-13% driven by market share gains, accelerated transformation spending and cloud-driven opportunities. Key factors that will shape CY2021/FY2022E are direction of IT spending, adaptation of sales strategies to a new normal and investments in nextgen competencies.

Infosys is Kotak’s top pick and will lead the industry on growth. Tech Mahindra is 5G, margin expansion and inexpensive valuation play. HCL Tech offers reasonable upside from current levels. Kotak believes that IT companies have done well to navigate changes post Covid and are well positioned to capitalize on ensuing opportunities. TCS and Infosys will lead the way. Wipro could be the dark horse, while HCL Tech has built in an element of predictability.

Raise revenue estimates and fair value by 1-4% and 4-10%:

Kotak raise their revenue estimates for our coverage universe by 1-4% driven by growing evidence of:

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(1) lift, shift and transform deals. In many of the deals the overall IT spending of clients does not increase but the outsourced component does. These deals may involve vendor consolidation, captive buyout and employee rebadging
(2) Aggressive spending on digital transformation initiatives with cloud forming the backbone of transformation.

Kotak expects large companies such as Infosys and TCS to grow by 13.5% and 12.1% in FY2022E as compared to 12.3% and 10.7% earlier. Increase in EPS estimates and roll-over drives 4-10% increase in fair value. Kotak believes that a few companies can grow in double digits for the next three years, which can support the current elevated multiples.

Constructive view on large deals has been reinforced by Increase in lift, shift and transform deals. In many of the deals the overall IT spending of a client does not increase but the outsourced component does. These deals can involve vendor consolidation, captive buyout and employee rebadging. IT companies have been adept at lift shift deals and now have developed capabilities and ecosystem partnerships to deliver on transformation components efficiently at scale. IT services companies have won and executed well on lift shift transform deals pre Covid and are well positioned to benefit from an increase in such deals post Covid.

Kotak is also excited to note aggressive spending on digital transformation initiatives with cloud forming the backbone of transformation. Skills shortage and need for faster time-to-market and greater agility will continue to aid outsourcing to IT vendors for digital transformation initiatives. Indian IT has steadily built capabilities in new-age technologies and delivery methodologies. Indian IT will be a key beneficiary of accelerated spending on digital transformation initiative.