Investors in Indian IT companies were a happy lot on Friday with the sector witnessing a huge rally following better than expected results by IT ‘bellwether’ Infosys in the third quarter.
Rub-off effect
Apart from Infosys scrip, which saw a sharp rise of 16.9 per cent to close at Rs 2,712.60, other IT majors such as TCS and Wipro too closed higher by 3.80 and 6.10 per cent respectively.
However, IT analysts believe the stock reaction was more sentimental on the back of strong Infosys results having a positive rub-off effect on other stocks in the sector rather than signalling a change in fundamentals in the sector. All eyes would now shift to results of TCS expected to be announced on Monday to give direction on the sector outlook.
Lower growth
According to Shashi Bhusan, Senior Research Analyst, Technology, Prabhudas Lilladher, markets would be looking out for results from other IT majors to reflect a fundamental change in the situation.
“Industry reports by Gartner and Forester suggest that there is going to be an uptick in IT spends going forward. We too are optimistic on the sector but we have to watch out for other top three or four IT companies performance such to see if the overall situation betters for the sector.
Presently going by the only parameter of the global macro economy which impacts demand in the IT sector, it appears that things seem to be improving,” he added. Some analysts, however, added that leaving Infosys aside, the valuations and pricing in certain stocks seemed stretched. “Valuations are higher at present which could mean that gains would be capped in the medium-term.
“Expectations from IT company earnings in this quarter were low. So, if collectively they manage to deliver good results it would give a positive signal about the industry and have a positive impact on stocks.”
On the sector's outlook going forward, a BNP Paribas India report said: “We expect structurally lower growth ahead for Indian IT vendors, despite market share gains because of high base and headcount-dependent revenue models, though a cyclical recovery could provide some upside. Lower growth could also pressure constant currency margins. We also believe investors should increasingly focus on cash flow metrics given the changing nature of IT services deals.”