FPIS up stake in TCS; reduce in HCL, Wipro

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).

FPIS have also cut their stake in Mindtree, Persistent Systems, eclerx Services, Sonata Software, and NIIT Technologies by up to 2 percentage points (ppt), according to the latest shareholding pattern disclosed by these companies. The data on Infosys’ shareholding pattern is awaited.

In L&T Infotech and L&T Technology Services, FPIS’ stake touched an all-time high. In the case of TCS, while FPIS hiked their stake by 0.11 ppt to 15.85 per cent during Q1, 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 Covid-19 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 runup seen thus far. One must also realise that the American and European economies are likely to slow down over the medium term, which can impact spending, and demand, and hence dent the fortunes of IT firms,” said G Chokkalingam, founder and chief investment officer, 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 a 10.9 per cent decline in the benchmark index.

“Our investor interactions indicate that the markets are factoring in a sharp demand recovery in H2FY21E/FY22E for the sector on the view that tech spends will 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 pandemic since March 2020, analysts remain positive on the sector and expect healthy return over the mediumto-long term. Edelweiss, for instance, has a “buy” rating for HCL, Infosys, Tech Mahindra, and TCS and a “hold” rating for Wipro. Among the lot, UBS views Infosys, HCL 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 firms 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.