IT Stocks Outlook: Range-bound next wk with downward bias Mon

[K.Karthik Raja]

IT Stocks Outlook: Range-bound next wk with downward bias Mon

Information technology shares are likely to remain range-bound next
week. On Monday, the technology stocks could see a negative bias as
friday's unexplained sharp rise may get corrected Monday.
The CNX IT index was up 6% yesterday, with HCL Technologies rising
10%, and Satyam Computer Services 7%.
Some research said this could be value-buying in the run-up to
Cognizant Technologies' 2007 financial result due Thursday.
While IT shares have been beaten significantly, and valuations are
definitely at a 52-week low, some analysts said there was little news
to cheer the sector.
TCS announced a reversal of variable pay this week. Stray talk of
large multi-nationals laying off bench employees has been doing the
rounds. And the latest is that a large MNC and one Indian IT company
have deferred induction of campus graduates who received offer
letters. "This is an obvious attempt to manage employee utilisation
rates, showing that margins are under immense pressure. It is similar
to what happened in the 2001-02 IT bust in the industry.
.
BUSINESS OUTLOOK
Order books of the IT sector are secure in the coming year, so we
believe a hit from a slowdown in the U.S. economy is still several
quarters away.
More importantly, the pipeline for contracts is still robust, a
hit for a
couple of quarters may only be seen because of a delay in decision
making at the client end. As a result, these stocks are still cheap,
and buying may start when the pessimism dies down to some extent
The sector will also be treated as a defensive bet as other
sectors begin to weaken in case the market falls. Revenue visibility
in IT
is high, and therefore these stocks are considered safe bets.
Some relief is also likely in the sector, as the U.S. Federal
Reserve's
125-basis point rate cut has not boosted the rupee against the dollar
so far.
Analysts even expect the rupee to depreciate in the near term.
.
MID-CAP
Stock-specific movements are likely in mid-cap IT shares.
Firstsource Solutions, Subex, and Sasken are seen down in the coming
few weeks.
Firstsource this week reported a hit in its earnings due to
reduced
income from its debt collections business.
Loan and credit card defaults in the U.S. are rising, and the
business is dependent on the amount collected, Firstsource management
said.
Optimistic investors said Firstsource would get an opportunity to
re-price these contracts in 3-6 months, and therefore business could
recover in the coming quarters.
In the mean time, the company has lowered its guidance, and said
net profit margin is likely to remain at the lower end of its 11-13%
guidance for 2007-08 (Apr-Mar), issued earlier.
Sasken, which was counting on royalty revenue from some of its
products, has had to discontinue one series of its products.
Sasken's royalty model was now shaken, as the company has not been
able to show results for four quarters.
Rolta India, on the other hand, is seen as a promising stock to
own, as the company reported robust earnings in Oct-Dec, and has an
order backlog of 11 bln rupees, of which 4 bln rupees will be executed
in 2007-08 (Jul-Jun).

Week-on-week closing prices of key software shares, in rupees, on
National Stock Exchange:
.
Company Feb 31 Jan 25 Change
(in %)
HCL Technologies 265.95 249.70 6.5
Infosys Technologies 1,594.60 1,519.85 4.9
Satyam Computer Services 421.20 407.50 3.4
Tata Consultancy Services 929.50 884.60 5.1
Wipro 440.05 431.95 1.9
.
INDICES
CNX IT Index 4,074.15 3,948.15 3.2
NSE Nifty 5,317.25 5,383.35
(1.2)
BSE Sensex 18,242.58 18,361.66
(0.6)