Will the IT party last?

The mixed response of the stock markets to the Q2 numbers of the IT companies raises the question as to whether the upturn in their share price has come to a temporary pause.

While Infosys and MindTree drew positive response to their results, the market has not really warmed up to the results of TCS and HCL Tech while Wipro appears to have escaped any negative perception since its Q2 results are yet to be out. This has left the investors nervous because of the ongoing turmoil in the Euro zone and the suspense over when the US economic recovery would really take place.

IDFC Securities Ltd, in its report on TCS after its Q2 results, rated the stock as ‘an outperformer', though it felt that its results were ‘marginally below expectations'. It said that though the results lacked positive surprises, TCS was ‘relatively well placed to sail through the challenging environment for IT services vendors' and maintained it as an ‘outperformer' with a 12-month price target of Rs 1,230.

Prabhudas Lilladher, while stating that the HCL Tech reported ‘lower than expected revenue growth' but better than expected margin, reiterated a buy with a price target of Rs 550.

In Wednesday's trading in the NSE, while Infosys closed at Rs 2,732.80 (up Rs 31.25), TCS closed at Rs 1,046 ( + 12.45), HCL Tech at Rs 407 (+ 5.40), while Wipro ended the day with a gain of Rs 11.45 to close at Rs 357.50. MindTree was a surprising loser, closing at Rs 395 with a marginal loss.

This happened on a day when the markets made a sharp recovery with the Sensex up by over 330 points and Nifty by more than 100 points raising questions as to whether the rally in IT stocks will face a thaw.

Mr Hitesh Shah, Head — IT Analyst, IDFC Securities, Mumbai, said, the “macro uncertainty would weigh on IT spending/ budgets and this is likely to impact FY13 growth” and suggested that the investors should stick to “top few names as they are relatively better placed to sail through this environment.”

While rating Infosys and TCS as ‘outperformer', he was ‘neutral' on HCL Tech.

Varying reactions

On the reasons for the market reacting differently to the results of different IT stocks, he said, the “market reaction to results was to do with performance versus expectation.”

On the growth of IT companies minus the rupee depreciation, Mr Shah said, the rupee “weakness has significantly helped on margin front.”

While the dollar denominated revenues were “sub-five per cent from top three companies in an otherwise seasonally-strong quarter,” the rupee weakness has also contributed to “earnings upgrades on the street as a weaker rupee gets factored into earnings model.”

The business growth (both pricing and volume) has been slower when compared to June quarter as also September 2010 quarter, he added.

However, if rupee appreciates to 45/46, it would be “incrementally negative for Indian IT companies.” He believed that TCS and Infosys were much better placed within the sector to “sail through these uncertain times.”

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