Have you ever wonder why Indian IT companies are aggressively moving to the engineering R&D space? We have seen a humongous rally in stocks like #LTI #KPIT #HappiestMinds #TataElxsi Does the surge in the stocks are legit or it’s time to take a contrarian view? 🧵
Nifty IT Index returns in CAGR $CNXIT:

1Yr: 74.8%
3Yr: 26.2%
5Yr: 22.3%
Midcaps outperformed the large-cap, and indices:
The question is whether the rise in the stocks is a catch-up rally to larger peers or something has fundamentally changed in the industry? Let’s take a step back, and try to understand what’s driving the surge in the stock prices in the first place.
COVID-19 has fundamentally accelerated the pace of technological advancement. More things have changed in the last 12 months that ideally would have taken a decade!

-The biggest beneficial to this is digital vertical of the IT industry.
-Some cos also include their IT engineering services business into this vertical.
-Software product development used to be a niche segment but now it has become the fastest-growing vertical of the industry!
-Among the segment, the engineering R&D vertical is doing extremely well, and recently we have seen aggressive M&A in this segment.
-The number of large deals has also increased dramatically.
-There were just 3 large deals in FY20 which jumped to 10 in FY21.
-Naturally, only those players will succeed in the long run who has strong capabilities in the product engineering space with a strong relationship with larger clients.
-However, different cos will be at different points in their life cycle, and of course, different things will be going on for them.
-In the IT sector, size is extremely important for the long term as cos can do cross-selling, and mine their larger clients over a period of time.
-This is a basic strategy that is followed by most of the mid-cap IT companies in general.
-However, few traits make these companies special.
-In the last few years, companies have brought in CEOs and top-level management from larger players who bring client relationships and proven strategies around scaling up a smaller firm. For example 👇
Ashok Soota, founder & executive chairman (#HappiestMinds) founded #Mindtree
Sanjay Jalona, CEO (#LTI) is from #Infosys
Ajay Bhutoria, CEO (#Zensar) is from #Cognizant
Sandeep Kalra, CEO (#PersistentSystems) is from #HCLTech
Karthik Natarajan, COO (#Cyient) is from #TechMahindra
-Now coming to valuation and financials, the PAT growth over the last year has been higher than the revenue growth, thanks to a steep decline in travel and visa-related expenditure. However, rising salaries are concerned on the margins:

-Q4 results are outstanding.
-Most of the companies delivered excellent results across business units, geographies, and specialized verticals / COE.
-Deal wins in digital are also very good.
-Generally, digital deals are smaller in size, however, they are extremely high in volume so even smaller cos can also bid.
-And the market is sufficient enough for everybody as of now.
-In fact, larger players are letting go of some of the contracts due to a lack of manpower 👇
Cognizant had to let go of business because it couldn't hire talent:

-Indian IT cos will continue to do well in the FY22 just by looking at the management guidance.
-Cos will report further acceleration in topline growth aided by strong deal wins.
-The decent earnings ensured better prospects of stock performance.
-Midcap IT cos will continue the momentum in FY22 and report sequential growth over a small base, however, EBIT margins may be impacted due to higher salaries.
-In short, mid-size cos will continue to do well, but one needs to take a stock-specific approach.

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