Infosys, HCL Technologies top picks in IT space: Religare

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Religare's report on India IT ServicesQ1FY16 Review: Revenue beat led by AmericasThe RCML IT universe reported better-than-expected Q1FY16 revenues, with 14.3% YoY growth, mainly led by North America. Margin performance however was mixed, with most companies faring better than expectations but HCLT trailing estimates and overall EBIT growth coming in lower at 12%. The recent INR weakness however, if sustained, may lead to upside risks to EPS estimates. We continue to prefer large-caps, INFO and HCLT. Revenue growth led by North America: The RCML IT universe reported moderate revenue growth of 3.3% QoQ/14.3% YoY for Q1FY16, with INFO, WPRO, MPHL and OFSS outperforming estimates but REDI and FSOL disappointing. Growth was primarily led by North America, where the business grew 5.1% YoY both for INFO and HCL and 4.4%/2.6% YoY for TCS/WPRO. INFO seems to be regaining market share in its core markets and accounts. Margins average at 20.1%: Q1FY16 EBIT margins for our IT coverage universe averaged at 20.1%, slightly higher than our expectations of 19.4%. Most companies, barring HCLT, fared better than expectations as wage hikes were offset by FX tailwinds. PAT performance mixed, INR tailwinds for Q2: PAT performance was mixed, with TCS reporting growth of 13% YoY as against overall PAT growth of 6% YoY for the RCML IT universe. Given the sharp INR depreciation over last fortnight, we expect INR to be a tailwind in Q2, as most estimates are at Rs 63.5 vs. the spot rate of Rs 66.View: Overall, Q1FY16 was a slightly better-than-estimated quarter for the RCML IT universe, and guidance from INFO/WPRO was in line with expectations. While margin performance was mixed, sustained INR weakness should support margins in the near term. We retain our preference for large-caps over mid-caps, with INFO and HCLT as our top picks. We roll over our TP for OFFS and MPHL to Sep’16, and cut our recommendation on HGSL to HOLD (from BUY)", says Religare Retail research report.For all recommendations, click here Disclaimer: The views and investment tips expressed by investment experts/broking houses/rating agencies on moneycontrol.com are their own, and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.

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