Spring time is largely over for IT services sector: Hitesh Shah, Research Analyst, IDFC

In an interview with ET Now, Hitesh Shah, Research Analyst, IDFC, shares his views on various IT stocks

Do you agree that the spring time for IT sector is over as Rupee has appreciated against the dollar and IT companies are fully priced?

Yes, spring time is largely over for IT services company. We had seen volume growth slowing down from the last two quarters and notably all the three large companies that have announced their results so far missed have my expectation on volume growth and revenue growth.

Clearly, it is not just the optimism which some of these companies were building in but the environment is so bad that we would continue to see muted volume growth in a low?? single digit Q-on-Q basis for the next couple of quarters and we also might see pricing coming off or average realization falling over the next three-four quarters. To that extent, I would continue to stick to the view of being underweight on IT services and playing it through a few large names.

In the large names in order of priority how would you classify your weightage right now?

As of now, we just have outperform rating on Infosys amongst IT services names and we have a neutral rating on TCS, Wipro, HCL Tech. We downgraded TCS post their result yesterday. So, clearly the order preference is Infosys than the next three names.

HCL Technologies has increased the dividend payout. Do you think that in the medium term, it has potential to outperform TCS and Infosys?

I do not think that they have increased their dividend payout. They have a quarterly dividend payout policy from quite sometime and they continue to pay recurring dividend. When environment is deteriorating, HCL's business is more at risk from two things--one their enterprise application services which is where they acquired Axon Accounts for about close to 30% of the revenue and also tech-led R&D services. These two segments have been more impacted during each downturn.

I see more risk at HCL than the top three names and to that extent, I do not think HCL Tech would outperform the larger peers at least in next 6 to 12 months.

Finally a quick call on currency fluctuations and what you think in terms of expectations there and how things have been handled so far for these companies?

My forecast has already built in some kind of appreciation if you look at it from the next 6 to 12 months perspective. I am building in closer to Rs 51 for the last quarter of this fiscal and then building in average of Rs 49 for FY13.

So far, Infosys has delivered the best because of their policy of not hedging beyond next one or two quarters. To that extent it has done well. But if currency starts appreciating, those hedging for longer term would be more beneficiaries.