Gladiator Stocks - IT Thematic: Relative outperformance to continue...

IT Thematic: Relative outperformance to continue...

- In this report, we are focusing on the IT sector, where stocks have undergone healthy retracement within the structural up move. Many quality stocks have undergone healthy price/time correction and are available as a favourable risk-reward proposition. In this report we have focused on Midcap IT stocks like Info Edge India and Birla Soft which are expected to catch up with their large cap peers

- The demand environment continue to be strong for Indian IT companies which reflects from the strong headcount additions for the companies i.e headcount additions for 9MFY22 is even higher than their FY21 additions. The demand environment is aided by some of the bold transformation programs being undertaken by their clients, spanning multiple parts of the enterprise and in accelerated time frames, as they recognize the need to transform every part of their enterprise with technology, data and AI and new ways of working. As per Accenture, only 30% of the workloads globally have been moved to cloud which means a long tail of opportunity of cloud transformation for Indian IT companies

- Attrition has been a cause of concern for the some time now as the attrition is continuously rising. However we believe that crest in terms of attrition has been already passed and it is expected to taper down in the coming quarters. The companies have already elevated their fresher hiring for FY22 and they are planning to hire even more freshers in the next 12 months which will take off pressure on attrition. The companies have also been opening delivery centres in tier II and tier III cities in India to increase their catchment areas as well as to facilitate hybrid working model which will also help in employee stickiness in the long term and is expected to take off attrition pressure

- The companies has been communicating their clients about the cost rise in terms of wage hikes amid high attrition. Clients has been receptive in terms of dialogue and recognised the elevated costs for the IT companies. IT companies has been in continuous discussion with clients for price increase and the response has been so far positive in terms of new deals

Info Edge India

Technical View

The stock has undergone healthy retracement over the past five months after witnessing relative outperformance during CY 20-21. It is seen resuming its primary up trend after a higher base formation near the long term 100 week's EMA (currently at Rs. 4540) and the previous multiple bottom during February to May 2021 thus offering a fresh entry opportunity with a favourable risk reward set up

It has registered a breakout above the last five weeks range Rs. 4730-4209 signaling resumption of the up move

Fundamental View

- Info Edge provides internet based service delivery like recruitment services (Naukri), real estate (99 acres), Jeevansaathi and Shiksha. It is a Quasi play on Indian start up like Zomato, PolicyBazaar, Shoekonect, Ustra, Gramophone and job market, matrimony services & real estate market. Prudent capital allocation and recruitment business EBITDA margin >50%

- The company is witnessing a healthy improvement in billing led by improvement IT and ITeS segment (~35% from IT and 13-14% from ITeS). Info Edge indicated that till the time attrition remains higher in IT, the hiring is expected to be robust. They will continue to see robust billings. The company also indicated that non-IT hiring in the last two years has suffered on account of Covid related issues and they are yet to see a green shoot over there. Info Edge also mentioned that there was very limited impact of the new variant on this business. They expect hiring in sectors like hospitality, travel to bounce back, going forward

Birla Soft

Technical View

- The stock after a stupendous rally of CY'21 has witnessed profit booking in the first two month of the current year. Currently buying demand is seen emerging from the major support area Rs. 410-430 being the confluence of the rising 52 weeks EMA and the lower band of the previous major consolidation area of July-October 2021 as can be seen in the adjacent chart thus signalling a favourable risk-reward set up

- It has registered a breakout above a falling channel containing last two months breather signalling resumption of up move and offers fresh entry opportunity

Fundamental View

Birlasoft Ltd (Birlasoft) has strength in non-ERP digital businesses like CRM, B & data analytics, app development & enterprise solution. The company caters to manufacturing, BFSI, energy & utility and life science. Debt free and healthy double digit return ratio (with RoCE of >19%)

The company continue to maintain that it is aspiring to reach US$1 bn annual revenues by FY25. Some of the building blocks for the same, which the management called out are i) strategic investments in existing capabilities and newer capabilities, ii) repeated business from existing clients, iii) they are also looking for M&A. The company also mentioned that deal pipeline remained strong at US$1.2 bn, which has improved significantly by 50% on a YoY basis

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Link to the report

Source : Equity Bulls

Keywords

ICICIDirect GladiatorStocks IT Thematic