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Stocks of major information technology companies are likely to trade in a narrow range next week, but HCL Technologies and Tata Consultancy Services may fare better than the other top tier companies. All the major stocks are expected to remain range bound, with a slight possibility of corrections. The top three IT companies, Infosys, TCS, HCL, have declared their Jul-Sep earnings, and the Jul-Sep results of Wipro Technologies. The trend for Wipro is negative in the coming week. Since the stock has already corrected 15% over the last 15-20 trading sessions, it has now entered an oversold territory. There is a possibility of a minor bounce, and if it does then we may see it swinging 5-6% on the upside in the near term.
Wipro will detail its Jul-Sep earnings on Friday. While there has been an improvement in demand in overall IT service industry, margin pressures and rupee appreciation could limit earnings upsides. Rupee depreciation has driven stable stock performance for the Indian information technology names despite material deterioration in year-on-year revenue growth trajectory. This benefit may not last for long, as the rupee depreciation kicker to earnings will likely start to wear off from Dec 2012 quarter, with companies potentially reporting a deceleration in earnings growth to even a decline on yoy comparison. Slowdown and increased competitive intensity drive our cautious view on Tier-1 IT. While Oct-Dec dollar revenue growth of various Tier-1 companies will moderate to a modest 3.5-13.0% in Oct-Dec, benefits of rupee depreciation will level off, as expected rate of the rupee is seen at 52.5 rupees.
For the Dec 2012 quarter, we expect companies to report a decline in earnings (Infosys) or at best, modest growth (Wipro, TCS). We expect TCS to remain the most defensive stock among the large-caps, but believe that the absolute stock upside would need improvement in the demand environment and discretionary spending that remain elusive at this stage. In the coming week, stocks of TCS are expected to trade sideways.
