Indian IT companies to see a re-rating similar to FAANG stocks: Edelweiss

Information technology (IT) stocks have been on the investors’ radar in the calendar year 2020 (CY20) as a safe haven bet at a time when the economic activity came to a near halt due to the Covid-19 pandemic and the subsequent lockdown to stem the spread of the virus. Thus far in CY20, the Nifty IT index has risen 15.5 per cent as compared to over 5 per cent decline in the benchmark Nifty50 index.

Analysts see more headroom for the IT stocks over the next few quarters. According to Edelweiss Securities, IT stocks are trading at a 40-60 per cent discount to their fair value and global peers, and this anomaly in valuation is likely to correct over the next three-four years.

“Digital revenues and growth rates of Indian biggies such as TCS, Infosys, and HCL Technologies are superior to global peers such as EPAM and Luxoft; yet they are trading at 20–60 per cent discounts to their fair value and a 50 per cent discount to these global companies. This anomaly in valuation, we argue, would correct as the digital wave builds up into a storm over the next three-four years and would effect a seminal change in investor perception,” wrote Sandip Agarwal, an analyst with Edelweiss Securities in a co-authored note with Pranav Kshatriya.

The brokerage further says that its in-depth analysis indicates a jump in earnings at a compound annual growth rate (CAGR) of 17-19 per cent over FY22–25 from 6-12 per cent over FY18–21, implying an uptick of at least 1.5 times in trading multiples—similar to that for the FAANGs ecosystem.

“All in all, we strongly contend that a substantial re-rating driven by multiple earnings upgrades and higher price/earnings to growth (PEG) ratios—similar to what happened in FAANGs’ ecosystem—is in order,” it said. FAANG stands for Facebook, Amazon, Apple, Netflix and Alphabet (formerly Google).

Among Nifty IT constituents, Mindtree has gained the most – up nearly 50 per cent year-to-date (YTD), followed by L&T Infotech, Infosys, Mphasis, and HCL Technologies, ACE Equity data show. (See table below)

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