What’s behind today’s tech stocks' rally?

IT sector shares soar

• Many IT sector shares surged to fresh 52-week highs this afternoon after a robust outlook by HCL Technologies in its mid-quarter update
• HCL Technologies shares gained 8% to Rs 776.65, surpassing its previous high of Rs 738.80, touched on September 8, 2020. Infy, TCS, Mindtree were other shares from the IT pack which hit fresh record highs this afternoon

HCL Tech’s mid-quarter update

• “HCL Tech’s Revenue growth for the current quarter is expected to exceed 3.5% QoQ in constant currency, significantly higher than the 1.5-2.5% average they projected just 2 months ago!”
• The EBIT% for the current quarter is expected to be between 20.5% and 21.0% 
• The company said that this bump in growth is enabled by broad-based momentum across all service lines, verticals and geographies.

How’s business shaping up in the sector?

• While the pandemic has hurt businesses in most other industries, the IT sector has remained relatively resilient. 
• 'Most of the IT firms have reported better than expected results in Q1FY21, aided by cost avoidance measures, favourable currency movements, and large deal wins.' The lower travel costs, lower operational costs (as employees working from home) and headcount reduction have helped companies to maintain their margins. 
• The Covid-19 pandemic has forced a tectonic shift in businesses processes to move towards greater digitization. In fact, Infosys and TCS said that many of their customers have shifted their focus on front-end transformation, resulting in significant traction for IT products and services.

INDmoney Analysis

• Technology is a very critical element to most firms’ operations across verticals. In these times, most businesses will be looking to augment their processes, which will increase data and could spend, a good tailwind for the sector. 
• The IT industry’s revenues are at an estimated $190 billion, growing at 7.7 per cent on a year-on-year basis and by 2025, they are expected to reach $350 billion.
•  From the lows of March, the BSE IT sector index has moved up by more than 70%. Year-to-date, the index is up by 20%. 
• The growth outlook remains robust, and these stocks could continue to attract investments, as investors look for defensive sectors in these volatile times

Consensus recommendations