IT Stocks Outlook: Likely to be range-bound next wk on hazy outlook

[B. Karthick]

IT Stocks Outlook: Likely to be range-bound next wk on hazy outlook
Saturday, Aug 2

Information technology stocks are seen moving in a range of 1%-5%
from the current levels because of a hazy business environment
scenario.
Movement in IT stocks would be gradual, and interest in them would
emerge from buyers looking for defensive bet, exiting from stocks in
those sectors that are hit by high interest rates and inflation.
Cognizant cutting its earning projection is not being viewed as a
major negative for the Indian IT sector, but still it is the
confirmation of an uncertain business environment.
"Due to the continued deterioration in the macro-economic
environment and sagging consumer and business confidence, we are
adopting a more conservative stance for the remainder of the year,"
Cognizant said.
Above expected Apr-Jun revenue growth announced by HCL
Technologies after market hours today may provide some support to the
company's stock.
HCL Technologies yesterday reported Apr-Jun revenue of 77.55 bln
rupees along with aggressive employee addition, indicating strong
outlook.
The company's staff strength stood at 50,741 as of June-end, up
21% year-on-year.
The company also said it expects new deals worth over $1 bln
(42.34 bln rupees) in 2008-09 (Jul-Jun).
The next trigger for the IT sector is likely to be in October,
when companies will detail their Jul-Sep earnings, and clear up
concerns on revenue growth in the second-half of this financial year.
With limited news flow from large-cap companies, the only factor
that has a direct bearing on the shares would be the dollar-rupee
rate.
The rupee has been stronger against the U.S. dollar ever since
Reserve Bank of India hiked repo rate by 50 basis points and banks'
cash reserve ratio by 25 bps Tuesday, hitting the export revenue of IT
companies.
Yesterday, the Indian unit ended at 42.34 rupees per $1. It is
seen trading in the band of 42.20-42.80 rupees per $1 next week.
The rupee is seen strengthening because global crude oil prices
may fall, which is a near-term negative for the IT sector.
Selling in mid-cap IT stocks is likely to continue after weak
results from Firstsource and Hexaware Technologies this week.
Hexaware reduced its full-year guidance, with its new management
saying the company is keen on consolidating its current business,
implying flat growth in Jul-Sep.
The ex-Wipro managers inducted recently, who seem richer by $1.3m
post upfront signing bonuses, seem to have a task on their hands as
Hexaware's internal controls and order book unravel.
There is a "buying opportunity" in Tech Mahindra shares.
After weak quarterly results, BT (formerly British Telecom) is
likely to focus on cost-saving initiatives, which would prove to be an
opportunity for Tech Mahindra.
We believe that the BTGS (BT Global Services) deal for Tech
Mahindra is likely to ramp up secularly in FY09, providing good
earnings visibility to the company.
BT is Tech Mahindra's largest client. The Indian IT major had
received a $1 bln contract from BTGS in 2006, but ramp-up in this
contract has been slower than earlier estimates.
Tech Mahindra shares ended at 756.25 rupees on National Stock
Exchange today, down 0.3% from Thursday.

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

Company Aug 1 Jul 25
Change (in %)
HCL Technologies 207.25 202.05 2.6
Infosys Technologies 1,639.45 1,547.40 5.9
Satyam Computer Services 391.05 383.55 2.0
Tata Consultancy Services 840.65 793.85 5.9
Wipro 433.85 366.25
18.5

INDICES
CNX IT Index 3581.85 3571.60
0.3
NSE Nifty 4413.55 4092.25
7.9
BSE Sensex 14656.69 13635.40 7.5

End

B.Karthick
Research Analyst.