TCS, Infosys, HCL Tech shares may stand to gain as US, European banks increase technology spending

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Sequential revenue growth recovery in the BFS space was recorded among almost all Indian IT firms.

Increased digital adoption has been the buzz word that has helped stocks of Indian Information Technology firms gain faster than the broader markets. TCS, Infosys, HCL Technologies, Wipro, Tech Mahindra, and other IT firms have all outperformed the benchmark S&P BSE Sensex since the end of March. Now, the digitisation that firms across the globe were expected to undergo is looking more realistic with technology spending of US and European banking and financial services firms remaining resilient in the quarter ending September 2020. Leading Indian IT firms stand to benefit from higher technology spends.

Digital spends accelerating

“Companies accelerated digitalization to cater to increased digital adoption. BFS firms will invest to migrate to cloud and reap full benefits of cloud transformation,” said brokerage and research firm Kotak Securities in a recent report. This has led the brokerage to expect healthy growth for Indian IT helped by market share gains via vendor consolidation and captive carve outs. Spends on digital transformation by Citi are likely to inch up to $1 billion, according to Kotak Securities, after the US-based bank was fined $400 million by US authorities over deficiencies in risk management practices in October. Others including JP Morgan and Goldman Sachs too highlighted and increased adoption of digital channels. 

Analysts at Kotak Securities noted that mid-size and regional US BFS firms continue to fund new technology investments through cost savings. “Similar to large banks, mid-sized firms have invested in digital platforms to cater to increased online interactions. Technology modernization is a part of key strategic priorities for several banks,” they said. With low interest rates expected to stay for long, European BFS firms are trying to adjust to a new revenue environment. Although they have reduced other operating and non-operating expenses, technology spends remain strong.

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IT firms clear beneficiaries 

Indian IT companies’ outlook for the BFS and insurance space was positive. Infosys highlighted an increase in investment for areas such as mortgage servicing, call center technology & operations and lending services. Along with the Vanguard deal, Infosys won 6 deals last quarter.  HCLT indicated a good demand environment and strong pipeline with deals in digital transformation, digital foundation and propositions such as payments and open banking. For TCS the BFSI space grew 6.2% with a strong momentum led by the Retail Banking and Mortgage sub-verticals.

Sequential revenue growth recovery in the BFS space was recorded among almost all Indian IT firms. Accenture was the only one that saw a decline in revenue while TCS grew 9.3%, Tech Mahindra grew 9.4% and Infosys saw a 7.8% growth. For most domestic IT firms, BFSI as a percentage of revenue in the last quarter was more than 15%.

Stocks to buy
Kotak Securities sees Infosys and TCS as leaders in the space among Tier-1 IT companies. The brokerage firm has a ‘Buy’ rating on Infosys and Tech Mahindra. HCL Technologies, L&T Infotech, and Wipro have an ‘Add’ rating. Mphasis and TCS have a ‘Reduce’ rating.

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