TCS, Wipro Record Highs Fuel Rally In IT Shares. Here's Why

TCS kicked off the earnings season on Wednesday, by reporting a net profit of Rs 7,475 crore in the July-September period.

TCS, Wipro Record Highs Fuel Rally In IT Shares. Here's Why

Record highs in heavyweights TCS and Wipro fuelled a smart rally in IT shares on Thursday, a day after management of the country's largest software services company said the space is geared up for a "multi-year technology transformation cycle ". "In the current phase, enterprises are building a cloud-based foundation that will serve as a resilient, secure and scalable digital core," said Rajesh Gopinathan, CEO and managing director of TCS, as the country's second most valuable company reported a 6.66 per cent sequential rise in its July-September net profit.

"In subsequent phases, we will see the native capabilities of these platforms being utilized to create innovative new business models and differentiated customer experiences," the Tata Consultancy Services CEO said. "What we are witnessing right now is the start of the first phase of a multi-year technology transformation cycle," he said.

Analysts say upbeat comments from the top helm of the IT bellwether, as the country began its earnings season, boosted investor sentiment, therefore triggering a rally on Thursday.

TCS kicked off the earnings season on Wednesday, by reporting a net profit of Rs 7,475 crore in the July-September period. Though its net profit fell short of analysts' estimates, it registered an increase of 6.66 per cent compared to the previous quarter.

The company's board approved a share repurchase worth up to Rs 16,000 crore, sending its stock as much as 5.39 per cent higher to a record Rs 2,885 apiece on the BSE. Tata Consultancy Services' earnings along with its plan to buy back 5.33 crore shares at Rs 3,000 apiece also lifted investor confidence.

Wipro shares also soared to a record high, rallying 9.69 per cent to Rs 367.75, after the IT major said its board will consider a share buyback plan on October 13.

"Buyback is important thing but rally in other IT shares in Thursday's session has come on the back of TCS management saying the industry is at start multi-year tech revolution," Urmil Shah, research analyst and vice-president at IDBI Capital told NDTV.

The two heavyweights pushed Nifty IT index - which tracks 10 IT stocks including TCS, Infosys, Wipro, HCL Tech and Tech Mahindra - as much as 5 per cent higher to a record high - its biggest intraday jump in more than three weeks (September 14).

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Among other stocks in the IT space, Infosys jumped 4.5 per cent, Mindtree surged 10 per cent, Larsen & Toubro Infotech rallied 8.5 per cent, Mphasis advanced 6.8 per cent, Coforge rose 6 per cent and HCL Technologies gained 4.5 per cent.

The latest jump in IT stocks comes at a time when technology shares are already in a defensive mode, underpinned by added demand due to the coronavirus pandemic-related restrictions.

Analysts are bullish on the prospect of a COVID-19-triggered shift in traditional businesses to digital solutions.

"In the immediate term, business opportunity for IT companies is to do Cloud migration work once the Cloud management thing happens and it becomes normal then they will look at other technologies like internet of things ( IoT), customer experience and so on," said Mr Shah.

COVID-19-related restrictions have boosted demand for technology whereas strength in the dollar is positive for domestic software firms, which earn the majority of their revenue from foreign markets.

"Covid-19 pandemic has proved that the businesses can be done in a digital way and this provides an opportunity for Indian information technology companies. The Indian IT companies have the technology of providing digital solutions," Vijay Chopra of Enoch Ventures told NDTV.

"While right now cloud migration is because of compulsion eventually that will save significant cost for companies and also enable operations to carry out seamlessly irrespective of location and then there can be many more opportunities for IT companies," Mr Shah added.