Kotak Institutional Equities hosted 10 IT services companies in their 2021 edition of the Chasing Growth conference. Not surprising to note that companies exhibited confidence on growth, have a fairly healthy deal pipeline and are optimistic on the digital transformation opportunity led by public cloud adoption. Demand for talent will increase with various strategies in place to meet the ensuing opportunity; TCS and Infosys are well-positioned. Kotak Institutional Equities remain constructive on the space; Infosys and Tech Mahindra are top picks in the IT Sector. Kotak Institutional Equities also like HCL Technologies and Wipro.

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Kotak Institutional Equities Digital transformation led by public cloud adoption has accelerated Enterprises have accelerated digital transformation initiatives to stay relevant during and post Covid with focus on experience transformation, accelerated cloud adoption, cybersecurity and analytics. Covid has highlighted benefits of public cloud adoption such as resilience, ability to scale infrastructure on demand, cost efficiencies and better security. Increase in the pace of public cloud adoption drives opportunities for IT services vendors.

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Cloud offers three layers of opportunities for IT services firms:

(1) cloud migration of IT workloads
(2) developing cloud native applications that utilize rich functionalities of the cloud
(3) enabling formation of innovative ecosystems across industries underpinned by cloud infrastructure adoption.

The opportunity is vast and can be over a time period of 3-5 years or even longer. Visibility of demand is strong for the next 1-2 years.

Strong near term demand outlook:

All companies that participated in the conference highlighted strong near term demand. Deal pipelines are strong after strong conversions for several companies providing confidence on continued growth momentum. Spending outlook in financial services, a key vertical, is healthy. Highly impacted verticals such as travel, manufacturing and discretionary retail will continue to recover over the course of FY2022.

Mega-deals—TCS and Infosys lead the charts:

Large deals are a focus area for all companies. All companies have a good deal pipeline in the US $50-500 mn range. The difference is in mega deals where TCS and Infosys have a clear lead contributed by strength in core modernization, digital transformation, platforms and IP. Infosys has a well-rounded focus on deals of all sizes. The company has won two billion dollar plus deals in the previous quarters and may have few more such deals in the pipeline. However the pipeline is not dominated by mega deals and consists of a good number of US$50- 500 mn TCV deals as well.

TCS has been the most consistent in terms of mega deal wins in past 2-3 years. Unlike peers, TCS’ margins have greater resilience and are not necessarily margin dilutive. Wipro has been a laggard in mega deals compared to Tier 1 peers. But mega deals ambition has been elevated under the new leadership. Wipro is focused on increasing the frequency of mega wins similar to US $700 mn Metro AG deal and is putting together large deals teams to aid in the endeavor. HCL Technologies on the other hand is not working on many US $1 bn deals but has several in the US$50-300 mn range.