Why is PINC Research upbeat on IT stocks?

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Why is PINC Research upbeat on IT stocks?

PINC Research has come out with its report on IT stocks.

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PINC Research has come out with its report on IT stocks.

• Deal signings: BFSI showing traction and acceleration from verticals like manufacturing and energy & utilities; telecom to remain sluggish.
- Cost-cutting initiatives - The offshoring budgets of clients continue to show good traction as CIOs look to justify IT investments.
- Discretionary spending - According to firms the trend is positive but no big deal signings. We believe due to uncertainty in macro global environment the projects will continue to be smaller in size and duration.
- Cloud computing - This is one area of high interest from the clients' perspective but still there are no big deals in the market.

• Billing rate at this point is stable with some sporadic cases of increases from existing clients. The price negotiation for rate card is still a difficult task but vendors are able to factor in the cost-of-living-adjustment (COLA) in the billing rates. We expect 1-2% billing rate increases for large IT companies in FY12.

• The hiring targets are on track and the campus offers have started to join the firm. We believe the employee pyramid to get better as more laterals were added during last year (Exhibit 2).

• The salary increments (Exhibit 3) have been given and this quarter we might see a bit of increase in attrition but the normalized low levels should return in Q2FY12. Risks - The biggest risk will be global slowdown in the demand, which will affect the revenue growth. The other major risk pertains to significant change in exchange rates.

Infosys
A wide range of service offerings and large clients offer stability to the overall business and the company is on track to outperform its revenue guidance unless US slips back into recession. Infosys has margin levers to outperform its own margin guidance of 300bpsYoY decline. Maintain 'BUY' recommendation with a target price of Rs 3,575 based on 21x FY13E earnings.

Wipro
The new organization structure has stabilized and no big exits have happened recently. Q1FY12 revenue growth will be weak compared to peers but it should close the gap subsequently. Maintain 'BUY' recommendation with a target price of Rs 515 based on 19x FY13E earnings.

MphasiS
FY11 growth will be muted but next fiscal it should be close to industry average with thrust from direct channel revenues and improvement in HP channel revenues. The possibility of open offer will provide some support to the price. At the CMP of Rs 466, the stock is trading at 12.4x and 11.6x FY11E and FY12E earnings, respectively. We maintain our 'HOLD' recommendation with a target price of Rs 480.

MindTree
The growth in IT services is strong but there is a future risk of loss of revenue due to direct competition with Ashok Soota's venture. At the CMP of Rs 351, the stock is trading at 8.8x FY13E earnings. We maintain our 'HOLD' recommendation with a target price of Rs 400 based on 10x FY13E EPS.

Sasken
The overall revenue in FY12 will decline due to ramp down in Nokia and we expect minimal revenues from it in our revenue estimates. Margins should improve due to reduction in onsite business and layoffs in onsite. The company has cash and equivalents of Rs 1,850mn after the buyback and dividend. At the CMP of Rs 146, the stock is trading at 7.1x and 6.7x FY12E and FY13E earnings, respectively. Excluding cash per share, the business is currently valued at ~4.5x FY12E earnings. We maintain our 'BUY' recommendation with a target price of Rs 175, says PINC Research report.

See which companies promoters have reduced stake in last quarter?

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To read the full report click on the attachment