The Hindu Business Line : IT services: Vertical advantage

If you had bought the shares of the top five IT services companies on January 22 this year, you would have been richer by 23-63 per cent by now, while the Sensex has gone nowhere. This in contrast to their being on the sidelines when the broader market rallied for the whole of last year.

Price-earnings multiples that were 9-15 times (FY08 earnings) in January are now in the 17-23 times range. While concerns of a slowdown in global IT spend persist, the recent depreciation in the rupee (7 per cent) and the extension of tax sops by a year to March 2010, are positives for IT earnings.

Concerns that moderated IT stock returns last year were an appreciating rupee, the global BFSI slowdown and risks relating to US clients. But the Tier I IT companies have still closed 2007-08 with a 22 per cent revenue growth and a 16 per cent net-profit growth. We believe investors should hold these stocks as they still have upside potential in line with earnings growth. .

Top Tier companies are also better placed when compared to mid-tier IT companies to weather a rough macro-environment due to their broader service mix, more verticals of operation and ability to enhance key operational parameters.

These five companies also have further headroom to increase utilisation levels and increase onsite component of revenues to reduce costs and drive volume growth. IP led revenues and newer delivery models such as SaaS could drive growth that is not directly linked to headcount.

Preferred picks: Buy HCL Technologies, TCS and 3i Infotech, given the valuation discount to the market. Continue to hold Satyam and Infosys for moderate upside.

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