Foreign portfolio investors (FPIs) have increased their stake in information technology (IT) major Tata Consultancy Services (TCS), Larsen & Toubro (L&T) Technology Services, and L&T Infotech, and trimmed their holdings in HCL Technologies and Wipro during the April – June quarter (Q1FY21).
That apart, FPIs also cut their stake in Mindtree, Persistent Systems, eClerx Services, Sonata Software and NIIT Technologies by up to two percentage points, according to the latest shareholding pattern disclosed by these companies. Infosys, which is scheduled to announce its Q1FY21 numbers on Wednesday, has not yet filed its June quarter shareholding data with the stock exchanges yet.
In L&T Infotech and L&T Technology Services, their stake touched an all-time high level. In case of TCS, while FPIs hiked their stake by 0.11 percentage points (ppt) to 15.85 per cent during Q2FY20, mutual funds reduced their stake to 2.51 per cent from 2.55 per cent in the previous quarter.
“Investors have been drawn to the sector despite this pandemic as this was one business segment that was still operational (work from home) even in the lockdown phase. That apart, opportunities in cloud computing and networking presented a new business opportunity to a select few. However, one must be cautious now given the run-up seen thus far. One must also realise that the US and Europe economies are likely to slow over the medium-term, which can impact spending, demand and hence dent the fortunes of IT firms as well, says G Chokkalingam, founder and chief investment officer at Equinomics Research.
Thus far in the calendar year 2020, the S&P BSE IT index has outpaced the market by gaining 6.7 per cent, against 10.9 per cent decline in the benchmark index.
“Our investor interactions indicate that the markets are factoring in a sharp demand recovery in H2 FY21E / FY22E for the sector on the view that tech spends would increase as companies move their business online. Investors also see relative safety in IT services due to strong balance sheets and cash flows,” says Diviya Nagarajan, an analyst tracking the sector at UBS.
Despite the run-up and the disruptions caused by the Covid-19 pandemic since March 2020, analysts remain positive on the sector and expect healthy returns over the medium-to-long term. Edelweiss, for instance, has a ‘buy’ rating on HCL Technologies, Infosys, Tech Mahindra, and TCS and a ‘hold’ rating on Wipro. Among the lot, UBS views Infosys, HCL Technologies and TCS as better defensive plays in the IT sector.
“The pandemic will accelerate cloud migration and digital transformation initiatives, leading to a substantial uptick in growth from FY22. We also believe most companies will rejig their cost structures – primarily travel and rental costs – as Work from Home (WFH) or Work from Anywhere (WFA) gains momentum. Moreover, physical meetings, training, conferences, etc., will be more wire-led, reducing costs substantially. While near-term pain can see some price correction, companies should give decent returns in the medium-to-long term,” wrote Sandip Agarwal of Edelweiss in a co-authored report with Pranav Kshatriya.
Stake in % as on June 30, 2020
*Change in basis points over March 2020 quarter