Sandip Agarwal from Sowilo Investment Managers shared insights on the recent performance of major IT companies like TCS and Infosys. According to him, the reduction in subcontractor costs from over 10% to under 5% is a key factor. Despite wage hikes, TCS saw a margin improvement from 23.5% to 24.7% over the past year. Agarwal believes margins are at their lowest and will improve further, potentially leading to a 10-12% EPS (earnings per share) upgrade.
Why the Market is Optimistic
The market sees these improvements as the start of an upgrade cycle. Lower attrition rates and better margins are positive indicators. Agarwal expects another 10-15% rise in stocks like TCS and Infosys, driven by this margin improvement and future revenue growth. While management remains cautious about immediate growth, investors are optimistic based on the improving margins.
Midcap IT Companies: A Mixed Outlook
For midcap IT companies, Agarwal suggests a divided approach. He finds IT services companies slightly overvalued but sees significant potential in ER&D (Engineering Research and Development) companies. ER&D outsourcing is a growing field with less penetration compared to IT services. Companies like Persistent, KPIT, Tata Elxsi, and LTTS are expected to benefit significantly due to their unique position in this niche market.
BFSI Sector and North America
Agarwal is cautious about predicting a recovery in the BFSI (Banking, Financial Services, and Insurance) sector, especially in North America. He recalls past instances where IT companies exceeded growth expectations despite initial negative forecasts. The absence of deal cancellations in recent quarters and robust performance by cloud service providers like Microsoft Azure and AWS are encouraging signs. Agarwal believes the demand for outsourcing will eventually benefit IT companies, with growth picking up in the coming quarters following margin improvements.
Agarwal remains positive about the future performance of major IT companies like TCS and Infosys, expecting continued improvements in margins and eventual revenue growth. He also highlights the potential of ER&D companies in the midcap segment, driven by long-term growth prospects in outsourcing.
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