Market voice: Rajiv Mehta, India Private Clients, IIFL

'Avoid mid-cap IT stocks'

Rajiv Mehta, assistant vice-president, research, India Private Clients, IIFL, tells Puneet Wadhwa that the information technology (IT) sector is unlikely to see a major rally due to stretched valuations. Edited excerpts:

Are the TCS and Wipro results in line with your expectations?
The second quarter results of TCS are good and above market expectations, but Wipro’s numbers have been below par. We expected revenues (in dollar terms) to grow around seven per cent sequentially, but TCS actually delivered 11 per cent.

On the other hand, Wipro reported a sequential growth of 4.8 per cent, as against an expectation of 6.5 per cent.

What about the guidance that these companies have put out?
Well, the commentary from TCS after results has been quite encouraging. The robust volume growth is expected to continue.

As regards Wipro, the guidance has more or less been in line, as the third quarter of a financial year is seasonally a weak quarter.

Any striking feature in the results of these frontline companies?
The most striking feature is the disparity in numbers. Since the past three quarters, TCS has consistently put up a good show. In fact, it outperformed Infosys Technologies in the recently-concluded quarter.

Wipro, on the other hand, has been lagging. Infosys has been, more or less, meeting expectations.

Have margins of these companies peaked, given the currency headwinds and other costs?
The outlook for all the three information technology majors — Infosys, TCS and Wipro — is different.

For TCS, margins seem to have peaked and the utilisation rates are expected to come down. However, the rupee movement is a common factor for the companies.

For Infosys, I expect a margin improvement in future.

What should investors do with the frontline scrips now?
We do not expect a rally in the IT scrips, as valuations look stretched. The room for a further upside is limited. These scrips cannot appreciate more than 10 per cent from the current levels. I suggest one can book partial profits. Avoid entering mid-cap IT stocks at these levels.