Cogencis, Thursday, Aug 20, 2020

By Chiranjivi Chakraborty

MUMBAI – The change in the demand outlook given by information technology companies following their June quarter earnings made both foreign portfolio investors and domestic mutual funds gung-ho over the sector's prospects.

Information technology companies caught most investors by surprise after the majority of them reported better-than-expected earnings for Apr-Jun, which was ravaged by the COVID-19 pandemic and subsequent lockdowns in key markets. More importantly, it was the sharp change in the commentary of managements that may have impressed foreign investors, who had earlier expected the sector to suffer from weak demand for legacy information technology services, given the deep global recession caused by the pandemic.

"We are witnessing a wave of new-age technologies being adopted by the customers as businesses across the globe are actively pursuing digital transformation," Tech Mahindra Managing Director and Chief Executive Officer C.P. Gurnani had said post the announcement of the company's Apr-Jun earnings.

The confidence exuded by information technology companies saw foreign portfolio investors turn net buyers in the sector in July, the first time in four months. Foreign investors net bought shares worth over 20 bln rupees in July, compared to over 100 bln rupees of selling in Mar-Jun, data compiled by Cogencis showed.

While foreign portfolio investors snapped their selling streak in the sector, domestic mutual funds, too, stepped up their investments in July. The weight of the information technology sector in the portfolio of domestic equity mutual fund schemes jumped 180 basis points on month to 10.5%, the highest in over four years.

The Nifty IT index, as a result, soared 22.5% in July, its steepest one-month rise in 11 years. The index rose to a near 16-year high, reflecting the optimism that the sector's June quarter earnings had sparked.

The selling by foreign investors in Mar-Jun was largely driven by concerns that a global recession caused by the pandemic could severely hit revenue streams of the sector. Most companies in the sector reported a single-digit sequential decline in revenues in the June quarter.

However, the need for businesses in the US and Europe to rapidly transition to remote working and accelerate a shift to digital infrastructure worked in favour of Indian IT companies.

Tata Consultancy Services CEO Rajesh Gopinathan suggested that the worst of the impact of COVID-19 on the company's revenues was over, while reiterating the view that it would return to growth from the December quarter.

Infosys CEO Salil P. Parekh said, "Our confidence and visibility for the rest of the year is improving driven by our Q1 performance and large deal wins." The company guided for growth in revenues in 2020-21 (Apr-Jun).

In recent years, Indian companies have focused on improving their digital technology offerings to clients to match global rivals such as Accenture and Cognizant Technologies, and that groundwork is now expected to help them compete for deals, analysts said.

The pandemic, according to Edelweiss Securities, has accelerated migration to cloud-based services and digital transformation by companies globally, which should lead to a substantial surge in revenues in 2021-22.  End

Edited by Shirsha Thakur