IT sector: Positive surprise

A couple of weeks back, as we were at the onset of the Q3 earnings number, IT frontline companies were expected to come up with not-so-spectacular set of numbers as it was argued that the December quarter is a “seasonally slow" quarter for most players, further affected by Hurricane Sandy and consequent shutdowns.

However, starting with Infosys, the Street was taken by a surprise, where the company popped back into the reckoning by delivering better than expected top line growth coupled with a very positive management confidence. This set the stage and the expectation for the other three IT companies and they didn't disappoint either. TCS, HCL Technologies too had a good season and rounding off the frontline names was Wipro with largely in line with expectation numbers.

At each point the Street rewarded the companies with stock price running uphill. And soon, there was some consolidation in these counters too. Now that Infosys is back on the radar, is there a new order of investor interest setting in the IT space?

From the stock price perspective, since the start of the current fiscal (April 2012), HCL Technologies has gained a whopping 46% and TCS run up 15.7%. Meanwhile, Infosys dipped 3% and Wipro gave up 9.5%.

Sanjeev Hota of Sharekhan opines that with respect to investor preference HCL Tech leads the pack followed by TCS, Infosys and Wipro. He adds that there is room for consensus upgrade and only a negative surprise on HCL Tech can ruin the current run the stock has seen.

Another voice in favour of HCL Tech was Pratik Gandhi from IDBI Capital. Gandhi believes that the company will continue to deliver on the IMS front. Also, the company has proven its ability to win market share in re-bid market, especially in IMS segment. Moreover, BPO biz is also stabilizing and margins can see uptrend going forward. On the valuation front too, the stock in undervalued and a re-rating cannot be ruled out.

However, market analyst, Kishor Ostwal would like to differ. Infosys would be his top pick as there is clear visibility about the company beyond the next few quarters which is not the case with HCL Tech. Adding, to this he expects another whopping 30% upmove in the stock price during the next six months. The reasoning for this optimism is based on the fact that as US and European economies are improving, the deals wins will be better for Infy as compared to other names.

The overall view on IT space seems to have improved as there is not many Sell side story emerging from this space. The improvement in global markets coupled with the Rupee fluctuations only seems to be making the space merrier by the quarter. As Dipen Shah, Senior Vice President & Head of Private Client Group Research, sums it, we have an overall positive view on the IT space as the demand scenario has picked up. Also, companies have hinted towards an uptick in discretionary spend which will only augur well for the companies. From the stock performance perspective, we expect further gains in TCS and HCL Tech while our target levels for Infosys and Wipro are very much near the current levels.