IT stock prospects uncertain, but worst priced in: analysts

Stocks of Indian IT services companies have, in recent weeks, responded to some mixed signals
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First Published: Wed, Dec 26 2012. 12 04 AM IST
Shares of Tata Consultancy Services Ltd, India’s biggest IT services firm that is now considered the industry bellwether, have gained 8.8% so far this year. Photo: Priyanka Parashar/Mint
Shares of Tata Consultancy Services Ltd, India’s biggest IT services firm that is now considered the industry bellwether, have gained 8.8% so far this year. Photo: Priyanka Parashar/Mint
Updated: Wed, Dec 26 2012. 12 25 AM IST
Mumbai: The same trends that drove some information technology (IT) stocks down and saw others rise in 2012 will be in evidence in 2013, say analysts.
Stocks of Indian IT services companies have, in recent weeks, responded to some mixed signals. On 18 December, Oracle Corp. reported quarterly numbers that beat the Street. But last week, Accenture Plc issued a second quarter forecast that disappointed.
The Oracle results suggested a budget flush with enterprise software sales and a recovery in IT spending, while Accenture’s lower guidance for the outsourcing business and an 8% decline in new outsourcing order bookings painted a more subdued picture for near-term services, Ambit Capital said in a note. According to Ambit analysts Ankur Rudra and Nitin Jain, the contrasting signals could be driven by the nature of purchases.
Enterprise software sales tend to precede services sales by a couple of quarters, so Oracle’s performance may be a prelude to a strong demand environment for services in the first half of 2013-14.
Given this uncertainty, analysts say IT stocks will likely mirror their performance in 2012 next year. Shares of Infosys Ltd have shed at least 6% so far in 2012, making the stock the worst performer in BSE’s benchmark 30-share Sensex, which has gained nearly 25%.
Shares of Tata Consultancy Services Ltd (TCS), India’s biggest IT services firm that is now considered the industry bellwether, have gained 8.8% so far this year while those of Tech Mahindra Ltd and HCL Technologies Ltd have risen 57.8% and 63.6%, respectively. Shares of Wipro Ltd have declined 3.3% since the start of 2012. BSE’s IT index has shed 1.4% this year.
With domestic software exporters facing stiff competition from global giants and a difficult demand environment, the days of ever-accelerating earnings expansion may be over, say analysts. Still, while Indian IT growth rates are slowing, they remain ahead of the global rate.
Worldwide enterprise IT spending will inch up 2.5% to $2.679 trillion (around Rs.148 trillion today) in 2013 as the deteriorating economic outlook of 2012 leads to scant overall growth in enterprise IT spending, according to consulting firm Gartner Inc. In contrast, IT spending in India is projected to total $71.5 billion in 2013, up 7.7%, according to Gartner.
According to Arup Roy, principal research analyst at Gartner, 2013 is going to be slightly better than this year, but there won’t be any dramatic improvement in revenue growth.
“Among the Indian IT companies, there will be one pack which will lead the growth and there will be the other that will not have stable growth. For example, TCS, Cognizant, HCL (Tech) clearly have a greater trajectory in terms of growth rate,” Roy said in a phone interview.
Meanwhile, TCS continues to be optimistic about growth. Despite some of its peers expressing their worries about the environment to analysts, the company has maintained its revenue growth target around the “mid-teens” in 2012-13 in constant currency terms, which translates into around 13% growth on a year-on-year basis in dollar terms, brokerage KR Choksey Shares and Securities Pvt. Ltd said in a 19 December report.
TCS expects clients will continue with their discretionary spending in calendar year 2013 to propel revenue growth, which is slowing because of global economic uncertainty, it added.
Meanwhile, Infosys has revised its guidance to analysts downwards. Brokerage Emkay Global Financial Services Ltd said in a 6 December report on Infosys that a further moderation in 2012-13 revenue guidance of at least 5% dollar revenue growth to $7.343 billion is likely given that decision-making on some large deals has been impacted by various events, including Hurricane Sandy.
Gajendra Nagpal, chief executive of Unicon Financial Intermediaries Pvt. Ltd, said: “As we enter 2013, TCS and HCL Technologies stocks do hold promise, while there is scepticism about Infosys and Wipro.”
“One thing for the sector at large is that most known and unknown negatives are priced in,” hesaid. “So, any pressure from unexpected events is not likely. The sector favourites are likely to gain the most from a re-rating, if it happens.”
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First Published: Wed, Dec 26 2012. 12 04 AM IST
More Topics: IT | software | Infosys | TCS |
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