Which IT, education stocks should you bet on?

“Q1FY12 for large cap IT firms was a mixed bag. While Infosys and Wipro disappointed the streets, HCL Technologies and Tata Consultancy Services Ltd. continued to outperform market expectations. Volume growth was more or less inline with estimates except for Infosys while Pricing has remained relatively stable in comparison to the previous quarter. Mid-cap firms posted robust revenue growth. However, most IT companies posted a decline in net profit margins as well as PAT growth on a quarterly basis due to the impact of wage hikes and the increased tax burden due to the withdrawal of STPI.

We believe that revenue growth should remain more or less in-line with NASSCOM’s 16 – 18% growth estimates in FY12 as most IT spending budgets in developed markets are already fixed for CY11. However, in view of the deteriorating economic conditions in the USA and Europe, we expect IT spending to drop by approximately 10 – 15%. This would impact IT services companies’ topline like Infosys, TCS as well as select midcaps like MphasiS and Polaris. Companies in the product development domain like Persistent, Rolta, however may not be impacted in the near run as demand for software continues to remain robust.

Recommendations: Amongst large caps, we like HCL Technologies and Tata Consultancy Services Ltd. HCL Tech is trading at a discount relative to its large cap peers. Amongst mid caps, we like Persistent Systems and Rolta India Ltd,” says Unicon Investment research report.

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