Expectations of better earnings trigger midcap IT rally

Excerpts from Midcap Radar on CNBC-TV18 Watch the full show » RELATED NEWS iGATE reports revenues of Rs 209.3cr for Q3FY08 Aptech gets recognition from PMI, USA ALSO READ See what other experts are saying about markets See what FIIs are saying about the markets See what Udayan Mukherjee is saying about the markets Nifty BSE | NSE 30/05/12 Are Mutual Funds betting on Nifty? Other Stocks in this news iGATE Global Solutions | MphasiS | Polaris Financial Technology |

By Raja Rajeshwari/CNBC-TV18

 

Midcap IT stocks have been rallying for the past few days on expectations of better earnings. There is also a revival in overall IT sentiment which is what is sparking this midcap IT rally.

 

On IT budgets:

Over the past one-month, we have seen various brokerages do a CIO Poll. We have not had many companies come and do the same. Cognizant came out with its numbers, which excited the market. It pretty much ran up after that. Accenture came out with its numbers by the end of December. It said IT spending will be flattish and are not seeing anything problematic with it. There is a lot of disconnect between companies like Cognizant and Accenture which should have come and had a positive take on the IT budget.

 

According to JPMorgan's CIO survey , IT budgets for 2008 will be under pressure. They feel discretionary projects or spends would be cut. "Prices may be renegotiated downwards. The medium-term offshoring trend is on track which will help IT companies in the short-term," the survey said

 

Similarly, Citigroup's CIO survey also comes and says the same thing. There could be a negative bias on IT spending, it said. "US CIOs expect their IT spending budgets to be up 1-2% (YoY). 80% of CIOs do not expect recent credit tightening to affect IT budgets. European and American CIOs with outsourcing contracts up for renewal plan to break contract down to smaller agreements. CIOs continue to point to several typically discretionary IT projects as their top priorities," the survey said.

 

The only difference between the two surveys being that US CIOs are looking more towards offshoring, Europe CIOs are not expecting any tightening because of the credit crunch. Right now, there seems to be a disconnect unless the community on one side, which has done all of these CIOs surveys, who are little negative right now and the managements of Cognizant, Accenture and iGate who have come and given positive cues.

 

JP Morgan has put this whole thing into perspective. Even in 2001-02, when you were going through the same thing, managements kept coming and saying they were positive for the six months, till you went into a slowdown, it said. So, the jury is still out. We will wait and watch what Infosys has to say. More clarity could emerge in February-March, and the cookie will come in April.

 

On the midcap IT rally:

If one takes a look at what happened over the past one-month, these companies have been clear value picks. The rally has been sparked by expectations of better earnings. Also, consolidation noise also added to the midcap party. Most brokerages have been coming and putting up a buy or hold on some of these companies after the correction and the rally up.

 

iGate came out with its numbers today. Earnings are ahead of estimates. The company has done well on the EBITDA front, even though the delisting is going to take place at Rs 410. If the company were not going to be delisted, one would be looking at an EPS upgrade coming into the stock. That is why it is gone up to about Rs 420 levels.

 

Take the case of Polaris . We are expecting good numbers this time. There are expectations of 6% revenue growth. But we need to see sustainability of revenue growth. So, this will be the Q2 running. Most brokerages have either a sell or underweight on this stock.

 

MphasiS is completely de-risked form the US slowdown. They have had a robust quarter, with 6% revenue growth led by EDS clients. Brokerages like Merrill Lynch and ICICI Securities have come and put a buy on this.

 

On Aztecsoft , the news is that they are looking out for somebody to come and take them over. They are asking an enterprise value of Rs 500 crore. The market capitalization of this no debt company works up to about Rs 430 crore. It also has negligible cash.

 

That is why one is seeing good expectations and a revival in the overall IT sentiment is what is sparking this midcap IT rally.