Indian IT shares could be in for a sustained multi-year uptrend

SPECIAL REPORT
Indian IT shares could be in for a sustained multi-year uptrend
India's successful IT industry is moving up from back-office outsourcing, and into the consumer market in English speaking countries. IT investors are reaping a bonanza in the markets at the moment.Courtesy: Getty Images

The Covid-19 induced WFH trend and increased focus and spending on new technologies like data analytics, automation, AI, etc., is forcing Indian IT companies to reinvent themselves from being service providers to emerging as knowledge partners. This is making them future-ready and is expected to keep them on the growth curve for several years.

Investors who bought IT sector shares a year ago are reaping a bonanza now. The S&P BSE Information Technology Index has almost doubled from 14,369.65 on June 1 last year to 27,627.31 on May 28 this year, a rise of 92.26 per cent.

Most of India’s big IT companies fared just as well. The Wipro share, which had been a laggard till recently, performed the best, soaring a 150.83 per cent from Rs 214.75 to Rs 538.65 over this period. Infosys, too, seems to have regained its old mojo, going from Rs 699.5 to 1,404.8, a jump of 100.83 per cent. Tech Mahindra, HCL Tech and TCS also soared 88.19 per cent, 68.70 per cent and 53.77 per cent, respectively, over the past year to Rs 1,021.85, Rs 943.65 and Rs 3,144,10.

Indian IT majors like Wipro, Infosys, HCL Tech and TCS have seen their share prices rise between 150 per cent and 53 per cent since June 1 last year. Early indications suggest this trend could sustain over many years.
Recording a celebration on a cellphone. Banking, financial services and insurance (BFSI), pharmaceuticals, retail, education and manufacturing are the main driving forces behind this heightened demand for IT services.
Recording a celebration on a cellphone. Banking, financial services and insurance (BFSI), pharmaceuticals, retail, education and manufacturing are the main driving forces behind this heightened demand for IT services.Courtesy: Getty Images

Shift in global trends augurs well for IT sector

Experts and analysts feel the ongoing bull run in IT shares could just be the beginning of a sustained uptrend in their share prices. That’s because they are being powered by the tailwinds of a major shift in global trends, powered by an increase in digitisation and increased focus and spending in the US, the main market for the Indian IT sector, and Europe on cloud infrastructure, data analytics, artificial intelligence, machine learning, cyber security and web technologies.

The Covid-19 pandemic, which has severely impacted India’s growth story, is proving to be a blessing in disguise as many companies both in India and across the US and Europe adjust to the new normal of work-from-home (WFH); this is leading to higher financial allocations for their IT departments, which, in turn, is resulting in greater demand for the services of Indian IT majors.

A man walks past a Paytm advertising billiboard in New Delhi. The rising salience of IT services in the West is leading to a transformation in India’s IT services companies as well.
A man walks past a Paytm advertising billiboard in New Delhi. The rising salience of IT services in the West is leading to a transformation in India’s IT services companies as well. Courtesy: Getty Images

Data, digitisation, automation driving revival in fortunes

Sectors such as banking, financial services and insurance (BFSI), pharmaceuticals, retail, education and manufacturing are the main driving forces behind this heightened demand for IT services. The Naukri Hiring Outlook Survey released in March this year shows that data, digitisation and automation have caused an irreversible transformation in the way companies have adapted during the post-pandemic era.

Hiring trends in the Indian software and software services sector grew a record 33 per cent in February compared to the previous month on the back of rising adoption of digital technologies. “As per the latest Naukri Hiring Outlook survey around 88 per cent IT recruiters have confirmed that new jobs will be created in the coming months. This confirms that the wave of digitisation will spread rapidly,” Pawan Goyal, Chief Business Officer, Naukri.com, told The Hindu.

The uptrend in share prices of IT firms is powered by tailwinds of an increase in digitisation and increased focus and spending in the US and Europe on cloud infrastructure, data analytics, AI, machine learning, etc.

Indian IT companies reinventing themselves

The rising salience of IT services in the West is leading to a transformation in India’s IT services companies as well. The sector is steadily reinventing itself from a provider of services only to a centre of knowledge with a focus on R&D, analysis, evaluation and creation.

Investors are particularly enthused by the progressively higher levels of vaccination in the US, which, they feel will help the world’s largest economy roar back to life. Add President Joe Biden’s $1.9-trillion economic stimulus package to this and there’s every possibility of a full blown recovery in the US in the foreseeable future.

The expected rise in US demand will fuel a boom in IT services – and Indian IT services companies could end up as the collateral beneficiaries of this.

Progressively higher levels of vaccination in the US and President Biden’s $1.9-trn stimulus package could lead to a full recovery in the US. This will fuel a boom in IT services – and Indian IT services firms could end up as collateral beneficiaries of this.

Sustained growth in revenues likely

“The trend towards higher automation on all aspects of business will result in a wide swath of investments in IT projects. The crucible of sustained economic growth is data analytics and all the assorted big data technologies. Aggregated together, 2021-22 should see sustained growth in both revenues and employment of Indian IT industry,” Alok Shende of Ascentius Consulting, told the media.

Experts see a bright future for the Indian IT sector as a result of these trends. A recent study by Nasscom, the IT industry’s leading lobby group, and global consulting firm McKinsey & Co, titled ‘Future of Technology Services – Winning in this decade’ estimates that India’s technology services industry will expand to $300-350 billion by 2025 – i.e., in four years – from $194 billion in 2020.

A Nasscom-McKinsey study titled ‘Future of Technology Services – Winning in this decade’ estimates that India’s technology services industry will expand to $300-350 billion by 2025 from $194 billion in 2020.

Expanding global footprint

Indian companies are increasingly focusing on expanding their global footprint to enhance their global delivery centres. According to the Indian Brand Equity Foundation(IBEF), an Indian government export promotion agency for the distribution of and sale of Indian products internationally, “in March 2021, Tech Mahindra announced its partnership with Enate, a UK-based robotic process orchestration solutions company, to offer Enate’s proprietary ‘robotic process orchestration (RPO) technology’, which offers a BPM, workflow and workforce management platform to help increase efficiencies and streamline operations between human employees and technologies such as RPA bots, OCR platforms and NLP/AI/ML technologies.

Then, “in February 2021, HCL Technologies (HCL), announced a five-year ‘Digital Workplace Services’ agreement with Airbus. HCL will create a modernised digital workspace for Airbus employees worldwide to improve customer experience and service quality.

Even Wipro, which had lagged its peers in recent years, has shed its conservative approach and embarked on expensive acquisitions to beef up its portfolio.

Under its new European CEO Thierry Delaporte, it paid $1.45 billion to buy Capco, a global management and technology consultancy providing digital, consulting and technology services to financial institutions in North America, Europe and the Asia Pacific.

Most analysts feel that the Indian IT sector, which had been stagnating in recent years, may have turned the corner and could be heading for a new growth phase. That could provide a big upside to the S&P BSE Information Technology Index and its constituents.

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