TCS, Infosys, HCL Tech and others will gain from Microsoft, Amazon and Google spending more on technology

• The brokerage firm Edelweiss has increased its target prices for Indian IT companies by 25-26%.
• The growth of Indian players will be fueled by Facebook, Microsoft, and Google’s parent company — Alphabet — spending more on technology solutions.
• It expects that Tata Consultancy Services HCL Tech see the biggest increase in target prices.

Indian IT stocks — like Tata Consultancy Services (TCS), Infosys, HCL Technologies and Tech Mahindra — are set to boom in the post-COVID era, according to the brokerage Edelweiss. “We believe the Indian IT sector will enter a high-growth phase with stocks poised to return 20-56% upside and near-term downside risk limited to 10%,” it said in a report dated June 8.

Edelweiss is betting on global tech companies like Facebook, Microsoft, Alphabet and Amazon doubling down on tech as well as the uptake in digital consumption that has been seen during the coronavirus pandemic. “Global tech companies have always fueled the growth of Indian players,” it said.

Keeping that in mind, Edelweiss has revised its earnings expectations to between 2% to 20% and target prices have been increased by 25% to 26% across the sector.



Global companies are making pushing money into technology
The commentaries of the over 200 global companies have made higher allocation towards technology — and past cycles indicate that this should benefit Indian outsources significantly. “For instance, Microsoft’s hyper-growth has benefitted Mindtree immensely,” said Edelweiss highlights that Microsoft currently contributes 24.8% to Mindtree’s revenue.

Facebook has made more investments in gaming with mobile apps, which could also lead to a massive increase in live streaming. “We plan to continue to invest in product development and recruit technical talent,” said Facebook CEO Mark Zuckerberg.

Microsoft and Google’s parent company Alphabet have also commented on making a significant investment in strategic growth opportunities. Amazon, the e-commerce giant, mentioned that it will continue to invest “aggressively” in technology platforms across all its business lines.

The ‘Techolution’ will continue to drive technology spends
The onslaught of the coronavirus pandemic has also forced the use of apps and platforms to skyrocket — something that Edelweiss pegs as ‘Techolution’. The brokerage believes this will drive technological spends across the value chain. “The biggest beneficiary will be cloud providers as increased data usage will accelerate migration to efficient frontier or Cloud,” it pointed out.

This is partly due to more people working from home and the sudden explosion of data. “Large cloud players’ earnings commentary clearly indicates that transition to cloud is much faster than anticipated pre-COVID-19,” it added.

As spends by global giants increase — which is revenue for Indian IT companies — costs are set to reduce as work-from-home will cut down on commute and real estate expenses. “Cost reduction initiatives owing to COVID-19 (e-travel, e-meetings, e-appraisals) will enable enterprises to restructure and re-innovate their business substantially to keep their margins stable, excluding currency fluctuations,” it said.

Where the risks still exist
Despite the massive uptake of digital solutions, the risk still remains will the GDP set to fall in many major countries, including India due to the impact of the coronavirus pandemic. It could also lead to some clients declaring bankruptcy.

The plummeting GDP could also lead to more protectionist voices coming to the forefront with more political events, like the US Presidential election, and an increase in unemployment. According to the US Labour Department, jobless claims in the country hit 1.5 million this week. Overall, nearly 20.9 million people in the country are receiving unemployment benefits for the week that ended May 30.

“Currency fluctuations and regulatory changes could be additional risks,” added Edelweiss. That being, IT companies earn in dollars. When the dollar is stronger, it offsets some of the key risks faced by them by reducing pricing pressure and increasing margins.

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