IT Stocks Outlook: Likely to be in focus next wk as defensive bets

[N.Sukumar]

MUMBAI - Information technology shares are likely to be in the
limelight next week in a subdued market, as the sector is relatively
insulated from the problem of rising domestic inflation and interest
rates that have cast a shadow on other sectors.

Headline inflation for the week to Jun 7 hit a 13-year-high of 11.05%,
dragging the broad market down by 3.5% today.

With a majority of its revenue derived from overseas and little
exposure
to debt, the Indian IT sector is largely shielded from domestic
economic problems.

We expect high inflation to lead to a hike in interest rates and a
possible drop in domestic consumer spending.

This would wean away investor interest from sectors like banking, fast
moving consumer goods, automotive, aviation and realty and draw focus
to defensive sectors like information technology and pharmaceuticals.

Sentiment towards IT stocks may also be boosted on account of the
rupee's weakness against the greenback.

The dollar-rupee rate is seen between 42.80-43.00 rupees per $1.

This implies a 6%-7% fall in the rupee against the greenback since the
start of the current quarter.

As a result, while dollar revenue and guidance of IT companies may not
change, the rupee depreciation will boost their revenue.

Also, IT majors like Infosys Technologies have been indicating renewed
spending by clients in developed markets.

After the global credit crisis there was some conservatism in IT
spending by clients from the U.S., particularly those in the financial
services sector.

Tata Consultancy Services continues to be at the receiving end of
this,
as the company has higher exposure than its peers to financial
services clients that have suffered losses because of the credit
crisis.

The company has also indicated lacklustre first quarter earnings,
compared with its peers.

TCS may book some loss in the first quarter of the current financial
year for free transition work, through which it expects to win orders
in the near future.

The TCS stock is now trading at a price to earnings multiple of 12
times,compared with 15 times for Infosys Technologies and 12 times for
Satyam Computer Services.

TCS traditionally trades at a 10% discount to Infosys Technologies and
at some premium to Satyam Computer.

While TCS valuation is attractive, in the near term the valuation gap
is
likely to remain at these levels till the first quarter results.

Tech Mahindra will announce a deal on Monday but we believe this is
unlikely to provide support to the stock because it has already been
factored in.

However, details of the deal are awaited to ascertain the margin and
revenue visibility of the company.

At the time of detailing its Jan-Mar results, the company had said it
made an upfront payment of 4.4 bln rupees to receive a large order
from an European telecom player.

Week-on-week closing prices of key IT stocks, in rupees, on National
Stock Exchange:

Company Jun 20 Jun 13 Change
(in %)
HCL Technologies 266.20 289.40 (-)(8.0)
Infosys Technologies 1,827.00 1,866.65 (-)(2.1)
Satyam Computer Services 455.40 481.00 (-)(5.3)
Tata Consultancy Services 863.85 909.60 (-)(5.0)
Wipro 473.75 478.00 (-)(0.9)

INDICES
CNX IT Index 4179.70 4322.70 (-)(3.3)
NSE Nifty 4347.55 4517.10 (-)(3.8)
BSE Sensex 14571.29 15189.62 (-)(4.1)

N.Sukumar
Research Analyst