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    Outperforming key indices! Why Nifty IT surged over 20% in July

    Outperforming key indices! Why Nifty IT surged over 20% in July

    Outperforming key indices! Why Nifty IT surged over 20% in July
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    By Pranati Deva   IST (Published)

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    The IT index was the best performing index in July, rising over 20 percent on the back of strong June quarter earnings by the major IT firms.

    The IT index was the best performing index in July, rising over 20 percent on the back of strong June quarter earnings by the major IT firms. The Nifty IT index surged as much as 22 percent this month as compared to a 6 percent rise in benchmark Nifty.
    Among stocks, all except one constituent in the index gave positive returns in July. Heavyweights Infosys, Wipro, HCL Tech and Tech Mahindra were up between 24 percent and 31 percent. TCS also advanced but were lower than those four stocks. It gained 8 percent this month.
    So Why The Surge?
    The companies exceeded Street expectations, delivering robust results in terms of revenue, margins, deal wins and guidance for FY21. This also led to material earnings upgrades for these firms. It is impressive as other sectors saw sharp earnings volatility due to the COVID-19 lockdowns and demand-supply disruption.
    Motilal Oswal in a recent report said healthy deal wins, robust deal pipeline and better-than-expected guidance for FY21 have driven 12-14 percent earnings upgrade for Infosys, HCL Tech and Wipro.
    "With most of the IT results out of the way, it is becoming very clear that software companies will stand-out this year as one of the few sectors which is standing tall on the earnings front. While the rest of the sectors posted 20-30 percent earnings decline, IT is looking relatively resilient with 5-10 percent earnings growth. There have been a series of earnings upgrade this quarter already for large-cap IT names," Hemang Jani of Motilal Oswal Financial Services said.
    Meanwhile, as per a report by Reliance Securities, a resilient model and defensive balance sheet of the IT companies limited the potential downside due to the adverse macro environment.
    Reliance Securities noted that the demand for IT services remained intact, as consumption of software/services – as a percentage of GDP – is on the rise. Indian IT industry is likely to continue to gain market share on the back of strong talent base and proven track record, it added.
    It further said that temporary suspension of H 1B visa by the US is likely to have a limited impact on the EBIT margin of Indian IT companies, as they have already reduced visa dependency and have 50-60 percent local workforce currently.
    Indian IT-Business Process Management (IT-BPM) industry, which is $191 billion in size, enjoys the lion’s share (55 percent) in the global IT outsourcing market.
    Portfolio Allocation
    Motilal Oswal has further increased its allocations to the IT sector in the model portfolio and added 100 bps to Infosys and introduced Wipro.
    "We believe Wipro is a good re-rating candidate due to (a) potential upside of a turnaround under the new CEO, (b) possibility of an impending buyback, and (c) relatively attractive valuations," MOSL explained.
    The increase in weightage in the IT sector in the MOSL portfolio came from trimming its positions in utilities.
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