IT Sector Out Look

Negative view is maintained despite marginal improvement in USD revenue

 USD revenue forecasts have raised marginally for most of the large cap stocks in the coverage universe. This is because of improving US macro data. However, checks suggest that IT services demand would continue to be soft in 1QCY12, but it would not be to the extent as expected earlier.
 On a sector basis, financial services and BPO are likely to slow down whereas utilities and telecom related services appear to be picking up.
 It seems that 19% depreciation in USD/ Rupee exchange rate since August 2011 could more than offset any foreseeable weakness in demand in FY13 because the street estimates probably factor in USD/ INR exchange rate of Rs.47 as against the current level of Rs.52. However, caution is advised before investing in IT stocks as uncertainty prevails in the exchange rate.
 It seems that Rs.52 level may prevail in FY12 and the exchange rate may return to the long term average level of Rs.45.50 beyond that.
 Rupee weakness is periodical whereas demand weakness is more sustainable. Therefore, the outlook on the sector continues to be negative and stock prices are likely fall in the coming months.
 Maintain ‘reduce’ rating on technology stocks. On a relative basis, TCS and Infosys are better placed because they are higher margin players in the coverage universe.