IT Stocks Outlook: Range-bound next wk on hazy US business outlook
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B. Karthick
Aug 30, 2008, 4:21:10 AM8/30/08
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IT Stocks Outlook: Range-bound next wk on hazy US business outlook
Saturday, Aug 30
Information technology shares are likely to remain range-bound, as
outlook on US offshoring trends remain hazy and companies are yet to
announce deals at their usual pace.
This arguably is the quarter in which most clients sign new deals,
and there are a lot of announcements from companies. But in the last
two months we have not heard much from the sector leaders, apart from
the statement that sales cycles have become longer.
In Jul-Sep 2007 Infosys Technologies added 48 new clients, Tata
Consultancy Services 51 new clients, Wipro 59 new clients, and Satyam
Computer Services added 37 clients.
TCS even received its landmark $1.2-bln deal from A C Neilsen in
Oct 2007.
In view of lack of communication, we have postponed our
expectations of revival in demand for technology services.
Revival in spends from retail and financial sectors in the US and
Europe is awaited to trigger rise in technology shares.
After the annual analysts day held by Infosys earlier this week in
Chennai, CLSA wrote: "The analyst day did not yield a catalyst for a
secular demand upturn ahead, and we see the waiting game continuing
into Dec08-Feb09, when the next budgeting season should clarify the
direction for FY2010."
Yet there is hope on two fronts. Valuations of the technology
sector are reasonably beaten down, so downside risk is limited. And
the second is hiring for the large cap companies is still steady,
suggesting likely growth later.
8,000 fresh engineers will be joining Infosys in a few weeks.
Hiring plans, as announced in the July earnings calls, seem intact.
Coming on the back of a widespread hiring slowdown at Indian IT
vendors, we believe that the influx of fresh engineers at Infosys
indicates at least a medium term hope that demand could recover.
A drop in rupee against dollar has also been supporting technology
shares, after the local unit hit 44 rupees to $1 this week
It has appreciated from low of 43.75 rupees per $1, but is
expected to trade in the range of 43.30-44.25 rupees next week.
Rupee depreciation translates into higher export revenue for
technology companies.
But that is a double edged sword, because most companies have
foreign exchange hedges at higher rupee levels. The loss in other
income would compensate for the gains.
Besides, the sector's reaction to rupee fluctuation would remain
muted till the business outlook clears.
Week-on-week closing prices of key software shares, in rupees, on
National Stock Exchange:
Company Aug 29 Aug 22 Change
(in %)
HCL Technologies 233.15 222.60 4.7%
Infosys Technologies 1,749.10 1,694.00 3.2%
Satyam Computer Services 419.70 386.55 8.5%
Tata Consultancy Services 812.20 817.00 0.6%
Wipro 432.40 416.50 3.8%
INDICES
CNX IT Index 3,926.80 3,829.40 2.5%
NSE Nifty 4,360.00 4,327.45 0.7%
BSE Sensex 14,564.53 14,401.49 1.1%
End
B.Karthick
Research Analyst.
Saturday, Aug 30
Information technology shares are likely to remain range-bound, as
outlook on US offshoring trends remain hazy and companies are yet to
announce deals at their usual pace.
This arguably is the quarter in which most clients sign new deals,
and there are a lot of announcements from companies. But in the last
two months we have not heard much from the sector leaders, apart from
the statement that sales cycles have become longer.
In Jul-Sep 2007 Infosys Technologies added 48 new clients, Tata
Consultancy Services 51 new clients, Wipro 59 new clients, and Satyam
Computer Services added 37 clients.
TCS even received its landmark $1.2-bln deal from A C Neilsen in
Oct 2007.
In view of lack of communication, we have postponed our
expectations of revival in demand for technology services.
Revival in spends from retail and financial sectors in the US and
Europe is awaited to trigger rise in technology shares.
After the annual analysts day held by Infosys earlier this week in
Chennai, CLSA wrote: "The analyst day did not yield a catalyst for a
secular demand upturn ahead, and we see the waiting game continuing
into Dec08-Feb09, when the next budgeting season should clarify the
direction for FY2010."
Yet there is hope on two fronts. Valuations of the technology
sector are reasonably beaten down, so downside risk is limited. And
the second is hiring for the large cap companies is still steady,
suggesting likely growth later.
8,000 fresh engineers will be joining Infosys in a few weeks.
Hiring plans, as announced in the July earnings calls, seem intact.
Coming on the back of a widespread hiring slowdown at Indian IT
vendors, we believe that the influx of fresh engineers at Infosys
indicates at least a medium term hope that demand could recover.
A drop in rupee against dollar has also been supporting technology
shares, after the local unit hit 44 rupees to $1 this week
It has appreciated from low of 43.75 rupees per $1, but is
expected to trade in the range of 43.30-44.25 rupees next week.
Rupee depreciation translates into higher export revenue for
technology companies.
But that is a double edged sword, because most companies have
foreign exchange hedges at higher rupee levels. The loss in other
income would compensate for the gains.
Besides, the sector's reaction to rupee fluctuation would remain
muted till the business outlook clears.
Week-on-week closing prices of key software shares, in rupees, on
National Stock Exchange:
Company Aug 29 Aug 22 Change
(in %)
HCL Technologies 233.15 222.60 4.7%
Infosys Technologies 1,749.10 1,694.00 3.2%
Satyam Computer Services 419.70 386.55 8.5%
Tata Consultancy Services 812.20 817.00 0.6%
Wipro 432.40 416.50 3.8%
INDICES
CNX IT Index 3,926.80 3,829.40 2.5%
NSE Nifty 4,360.00 4,327.45 0.7%
BSE Sensex 14,564.53 14,401.49 1.1%
End
B.Karthick
Research Analyst.
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