Nirmal Bang picks HCL, TCS as top IT stocks for FY13

After the good results of companies like HCL and TCS, Harit Shah, Sr. Research Analyst, Nirmal Bang Institutional Equities feels that the market will get a clear picture of the IT sector only after the first quarter of FY13.

Looking at HCL Tech’s decent run and a rise of about 25-30% in its stock price, Shah said the IT sector is looking forward to a front-ended growth. Besides HCL Tech, MindTree and Hexaware are Shah's favourite picks in the IT sector. Below is the edited transcript of his interview with CNBC-TV18. Also watch the accompanying video. Q: Let's get to the numbers that we already know about. Clearly the pick of the pack have been HCL and TCS, so let's start with the best. TCS good results, good commentary, but is it all in the price? Would you still buy it?
A: I think the stock price after the result itself captures the upside. What is more important now is that the market will be looking for actual performance in the first quarter of FY13 before you get any further upside because as far as IT is concerned, front-ended growth is something that the street has taken a liking towards. Back-ended growth, the kind for which Infosys and Wipro have probably guided for, is something that the street obviously is not very enthused about.
I think that even while TCS does not give guidance, their demand commentary seemed to be quite positive. They did say that it's going to be a fairly normal growth year. Now it's up to the company to perform. Q: On the other hand, Infosys has a very weak result. But, we have had a lot of correction. In fact one of your peers, Citi, has upgraded Infosys with the target of some Rs 2,700. So some of the sell side analysts believe the negatives are getting factored in. Do you share that view? Do you think Infosys could be accumulated at this point?
A: From a valuation perspective, yes. You might say that the downside seems to be quite limited. The company has stopped giving a benchmark as far as guidance is concerned. If you look at the last several quarters, it has seriously underperformed its guidance.
So far in FY13, what we have seen among the top tier IT pack is that you have companies like HCL Tech and TCS which are winning more market share as compared with maybe a Infosys and a Wipro. That is going to reflect in the financials in FY13. If a similar trend plays out in FY13 you may actually see the company underperform its own guidance. Again that would not obviously be something that the street will take too kindly to. 
At this point I think it makes sense to wait a little bit. I think we need to wait until the first quarter results to see if there is any change at all in the management commentary and it's very, very cautious commentary that it has been giving for the last several quarters. We wouldn’t really jump into the stock at this level. Q: Let me go with the winners yet again. I understand there is a 30% rise in HCL Tech's stock price year-to-date. Again is all the good news in the price? How are valuations stacking up? Is it a buy? What’s your target price?
A: We had upgraded the stock in January to a buy. It's gone up by about 25-30% odd since then. Even as far as HCL Tech is concerned, purely from a valuation perspective, I think everything is in the price. We have a target of somewhere around Rs 515-520 at this point.
But, I think going forward what is important is that we believe this will definitely be among the preferred IT packs as far as FY13 is concerned because of the fact that the revenue visibility is so good. They won about USD 2.5 billion of deals over the last couple of quarters.
I think that is something which inspires some confidence in the fact that over the next two-three quarters, HCL Tech will continue to outperform the industry. On that basis I think it’s a stock which we would definitely recommend to accumulate on declines. Q: We have had the frontliners declare numbers, the midcaps are yet to declare them, some of them at least. What's your sense of things like Hexaware? Anything that you would want to play ahead of the results, expecting a good result performance?
A: At this point we don't really have too many midcaps under coverage, so we won't like to comment now.
Q: Is there anything in the midcap space that attracts you in the IT space?
A: We have seen a fairly decent run up in stocks of companies like MindTree and Hexaware. At this point, we don't really have official coverage on them, but I think that we have a pretty significant run up, especially after the results in companies like MindTree.
I wouldn't like to go ahead and make any stock recommendation on them right now, but just purely from a mathematic perspective if you were to ask me about midcap IT, we would look at specific companies that are focused on a particular vertical that have built significant scale, that have demonstrated very good performance in the last few quarters specially post recession.
I say this because especially due to recession, the gap has widened significantly between the mid and large cap IT firms. I think companies with strong revenue visibility like Hexaware or MindTree, from a mathematic perspective, are midcap stocks as you would typically look at the right price. Q: Idea is also a stock you track very closely. What are you expecting by way of numbers? Our poll threw up I think a 5.3% QoQ growth. Where do you stand in terms of sales of course? Are you a buyer in that counter?
A: No, at this point in time we are very cautious on the telecom sector. The regulatory risk has only intensified over the last few days, especially post the TRAI recommendations and also the Supreme Court has given a deadline of 31st August to the government for conducting the auction.
That would obviously require a lot more urgency on the government's part to take a call on what price they should charge incumbents and the new operators for spectrum and this obviously ties up with license renewal as well. 
From that angle, we believe, this regulatory overhang is going to continue over the sector and we won't really jump into any of the telecom stocks at this point in time. We currently do have a negative rating on all telecom stocks.