Prefer Infosys, TCS, HCL Tech among large caps: PINC

Clients have broadly finished their budget exercise and the global macro uncertainty is likely to delay discretionary spending but thrust offshoring. The momentum in project ramp-up is expected to begin from Q1FY13. Companies have not revealed their hiring plan for the next fiscal. But the large tier firms have given a commentary to outperform the guidance. Aggressive mid-tier IT firms confident to grow above industry average. Due to soft demand environment, firms want to innovate through IP revenues and build expertise in emerging technologies like cloud computing and mobility. This will allow participation in complex and innovative deals which are incrementally growing at faster pace.

A few mid-cap firms have kept the revenue growth momentum to match the higher end of the spectrum. Margin fluctuations in certain companies have been higher leading to uncertainty. The possibility of pricing increase in FY13 is low hence levers like offshoring, utilisation will come into play. Companies with good revenue growth momentum can benefit from change in employee mix. Top picks - Infosys among large caps; NIIT Tech, MindTree and Hexaware among mid-caps.

Infosys is likely to benefit from improving situation in the west and expected financial stability. In FY13, no significant pressure on operating margin due to lower salary increment and stable currency compared to FY12 on an average. Maintain ‘ACCUMULATE’ recommendation with a TP of Rs 3,200 based on 18x PER multiple on 18-months forward earnings.

MindTree has been able to deliver good growth in IT services and even after weakness in Product Engg. Services the overall growth rate is higher than the industry. Q3FY12 margin of 17.3% was at higher INR/USD of 50.1 and Q4 margin is likely to dip significantly due to rupee appreciation. We have concerns on improvement in the operating margin and sustainability of the same. Maintain ‘ACCUMULATE’ recommendation on the stock with a TP of Rs520 based on 10x PER multiple on 18-months forward earnings.

There is further decline expected in top account and margin sustainability is also a concern. The fundamental problem is revenue growth which can be mitigated only through some deal wins. The stock has recently run up with the news of open offer. We downgrade the recommendation to ‘REDUCE’ with a target price of Rs120 based on PER multiple of 6x 18-months forward earnings.

Institutional holding more than 40% in Indian cos

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