IT among the most promising sectors, here are analysts' 5 top picks

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IT stocks logged strong gains in 2020 following the coronavirus outbreak and brokerages and analysts say the sector is poised to gain further in the new year.

Year-to-date, the Nifty IT index has gained more than 53 percent, while the Nifty is up about 13 percent.

Global financial firm Goldman Sachs has resumed coverage on the IT sector and said the third wave of the IT outsourcing cycle is ahead.

“We resume coverage of Indian IT with a strong positive outlook,” CNBC-TV18 reported Goldman Sachs as saying.

Goldman Sachs has a “buy” on Infosys, Mindtree, TCS, Tech Mahindra & Mphasis. It has a “sell” on Wipro and a “neutral” on HCL Tech and L&T Infotech.

Goldman Sachs believes digitalisation is at scale and work from anywhere are the twin engines to help the companies gain market share.

“We forecast a sharp pick-up in FY22/23E dollar revenue growth of 13.1 percent/9.7 percent for the top-five IT companies. Forecasts are backed up by a strong US GDP growth forecast for 2021,” Goldman Sachs said.

While the sector is teeming with positive sentiment, one should avoid betting blindly. Here are five stocks from the sector, suggested by analysts that can give a healthy return in a one-year timeframe:

Analyst: Jyoti Roy-DVP-Equity Strategist, Angel Broking

Persistent Systems | Buy | LTP: Rs 1,468 | Target price: Rs 1,677

Persistent Systems has a very strong presence in hi-tech, manufacturing and life sciences segments, which are among the least affected sectors from COVID-19.

Persistent has posted a very good set of numbers for Q2FY21 along with strong deal wins. The company has also reported improvement in margins due to tight cost-control. It has won a large deal during the quarter that will ramp up over the next few quarters.

The new management’s focus on annuity deals is expected to lead to stable growth. “We expect the company to post revenue/EBITDA/PAT growth of 11.6 percent/21.4 percent/19.7 percent between FY20-FY22 given the negligible impact of COVID-19 on FY21 numbers, strong deal wins, a ramp-up of existing projects along with margin expansion,” the analyst said.

HCL Technologies | Buy | LTP: Rs 917 | Target: Rs 1,051

HCL Technologies is among the top four Indian IT services company and provides a gamut of services like ADM, Enterprise solutions and Infrastructure management services.

HCL Tech has posted a strong set of numbers for Q2FY21 and also raised its guidance for FY21. The company, in its release, highlighted that execution was strong during the quarter to date, while deal momentum also remained strong led by life sciences and healthcare, telecom and media and financial services verticals.

The deal pipeline also remains strong across service lines, verticals and geographies. At the current price, the stock is trading at a significant discount to the other largecap IT companies like Infosys and TCS and offers tremendous value at the current levels, given its market leader status in infrastructure management.

Infosys | Buy | LTP: Rs 1,237.35 | Target price: 1,389

Infosys has seen the greatest resilience in demand amongst the Tire-1 IT companies, given high exposure to digital services that accounted for 47 percent of the company’s revenues in Q2FY21.

The IT sector has witnessed a strong bounce back in demand post-COVID-19 due to the accelerated adoption of digital technologies.

The demand environment for outsourcing is also expected to remain strong, which was recently highlighted by Accenture in its Q1FY21 earnings.

“We are positive on Infosys from a long-term perspective, given the company’s high exposure to digital services which will be the growth driver for the sector for the next few years,” said the analyst.

At the current levels, the stock is trading at a P/E multiple of 25.3 times FY22 EPS estimate of Rs 49.6, which is a discount to TCS and offers value at current levels, the analyst pointed out.

Siddharth Sedani, Vice President, Equity Advisory, Anand Rathi Shares and Stock Brokers

Sonata Software | Buy | LTP: Rs 388.75 | Target price: Rs 410

Sonata’s travel vertical bounced sharply (167 percent QoQ, but down 68 percent YoY) after a Q1 slump.

It is likely to continue its growth trajectory, given the low base and despite renewed travel concerns.

Its Q2 IT services $39m revenue (up 5 percent QoQ, but down 19 percent YoY adjusted) is likely to regain pace on the strong OPD/ISV pipeline and retail. Its domestic revenue growth (up 23 percent YoY to $71 million) is also likely to persist.

Swift cost optimisation in the last six months resulted in consolidated H1 EBIT of Rs 145.10 crore, down just 10 percent YoY (vs initial guidance of up to a 40 percent fall).

No marked change in estimates. Margins improve with utilisation; hiring plans re-visited.

TCS | Buy | LTP: Rs 2,908.95 | Target price: Rs 3,230

TCS, a division of Tata Sons Limited, is a global IT services organisation that provides a comprehensive range of IT services in diverse industries.

For the past five years, the company has been outperforming across all verticals and geographies. Margin expansion was largely driven by revenue growth.

Despite the headwinds facing the global economy, TCS continues to fare better on the back of strong performance across.

In Q2FY21, revenues have sharply bounced back on the back of healthy demand. The company has also seen market share gains via vendor consolidation opportunities.

Further, accelerating investment in digital and core transformation will be a key driver of technology in coming quarters.

“We believe TCS has a resilient business structure from a long-term perspective and multiple long-term contracts,”

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