IT Stocks - beneficiary of $ appreciation

Information technology (IT) stocks, which had underperformed the broader markets until mid-September, are now back in favour. Since 12 September, the CNX IT index of the National Stock Exchange has outperformed the benchmark Nifty by nearly 20%, more than making up for its underperformance earlier in the year.

Needless to say, this is because of the sharp depreciation of the rupee since August. It closed at 52.73 against the dollar on Tuesday, nearly 20% higher compared with levels of around 44 in early August.

According to an analyst with a foreign brokerage firm, every Rs. 1 increase in the rupee to dollar rate leads to an increase of around 3.5% in earnings for Infosys Ltd. The increase in earnings will be lower for firms such as Tata Consultancy Services Ltd, since they have hedged to a much higher extent. Even if one were to assume that the rupee to dollar rate in the medium term will average 50, this will lead to an over 20% increase in earnings estimates for Infosys compared with August.

Besides, the sharp rise in the rupee will provide a large margin buffer for IT companies, which will not only offset the pressure of wage inflation, but also companies’ leeway to spend more on sales and marketing to generate demand.

This is a welcome relief for companies in the sector as well as investors. In fact, a number of importer firms as well as companies with unhedged foreign currency borrowings are reeling under the pressure of a falling rupee. Given the widening trade deficit and the drop in portfolio and capital flows into the country, the fall in the rupee is expected to continue. In this backdrop, IT stocks may continue to outperform the broader markets.

Of course, the rise will be limited, given the weakening global macroeconomic situation. Infosys’ chief financial officer said on Monday that the company may miss the upper-end of its sales target for the December quarter and the fiscal year because of a deterioration in the global economic environment.

Even so, IT firms seem much better placed compared with firms catering to the domestic economy, which are grappling with high inflation, high interest rates as well as the impact of a declining rupee on their imports and borrowings.

Our Advise

Large Caps - Build your portfolio - hold long term

1. Infosys - Monthly High Rs.2875 and Low of Rs.2487 - Buy around 2500 on dips
2. HCL Tech - Monthly High Rs.380 and Low of Rs.450 - Buy around 400 on dips
3. Wipro - Monthly High Rs.387 and Low of Rs.327 - Buy around 350 on dips
4. TCS - Monthly High Rs.1040 and Low of Rs.1132 - Buy around 1060 on dips
5. Tech Mahindra - Monthly High Rs.640 and Low of Rs.543 - Buy around 550 on dips

Small Caps - Purely Trading bets - hold short term

1. Onmobile Monthly High Rs.640 and Low of Rs.543 - Buy around 550 on dips
2. Educomp Monthly High Rs.280 and Low of Rs.175 - Buy around 170 on dips
3. Mahindra Satyam Monthly High Rs.76 and Low of Rs.64 - Buy around 65 on dips
4. Mindtree Monthly High Rs.380 and Low of Rs.420 - Buy around 400 on dips
5. Patni Monthly High Rs.444 and Low of Rs.343 - Buy around 380 on dips

Source Livemint.com

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OnMobile Global - Buy on dips

IIFL is bullish on OnMobile Global and has recommended buy rating on the stock with a target of Rs 136 in its June 7, 2011 research report.

“OnMobile Global has deployed its infrastructure to supports 3G products like video on demand & IVVR on several operator networks. However, the initial 3G revenues consists of charges for mobile broadband and operators are yet to cover pan-India, which implies product usage (& hence revenues) would take some time to fructify for OnMobile. Moreover, telcos have diverted a sizable chunk of ad spends towards creating awareness on 3G services which has had an impact on VAS promotional activity. Company has indicated such a phenomenon has a temporary dampening effect on revenues, but is unlikely to lead to any long-term structural shift away from VAS.”

“OnMobile is now live in 6 Latin American countries, as part of its Telefonica deployment and covers 80-85% of population. It has achieved ~1.5% penetration rate in large markets like Brazil, Mexico & Argentina; encouragingly, Lat-Am RBT ARPUs are ~2-3x that for India. International revenues have also risen from 25% to 32% in the past 4 quarters, which helps diversify what is hitherto an India-centric business. Q4 FY11 domestic revenue fell 12% qoq due to a change in the contractual scope whereby content management was removed from its responsibilities at a major telco, leading to a ~10% qoq contraction in topline; Ex-such change, sequential revenue is flat-company attributed this to a seasonally lean period for capex orders at its European units and newly acquired Dilithium (video products) business as well as weakness in European economy. We believe Q4 results do not form part of broader trend and expect growth momentum to resume as international revs ramp up led by Telefonica deployments.”

“OnMobile is set to report increased traction in revenues driven by leadership in domestic business and upsides from Telefonica and Vodafone deals. It has guided for Rs600-800mn in capex in the current fiscal, comfortably supported by ~Rs1.9bn in operating CF in FY12. Stock trades at 9.8x FY13 PER which provides an attractive entry point, in our view; maintain Buy for a target price of Rs 136,” says IIFL research report.

Our Recommendation :

The stock gave negative results in the last 1 year (Co gave a bonus of 1:1 ratio)

Time Span Price Change %Change

Today 74.25 -13.15 -15.04

Week 91.80 -4.40 -4.79

Month 109.15 -21.75 -19.92

Three Months 112.20 -24.80 -22.10

Six Months 112.10 -24.70 -22.03

One Year 143.93 -56.53 -39.27

The performance for the quarter is below market expectations and has seen huge sell off resulting the stock hitting 52 week low of Rs.72. Investors can look to buy the stcok in case of further correction to Rs. 50 levels as the outlook for the services of the company remain robust.

Bought to you by

Ingenious Investor

Equity Research Division

Ravina Consulting

Pattamal Plaza

3rd Cross Kamanahalli

BANGALORE 560084

For Free Stock Advise + Ideas

sowmya@ravinaconsulting.com

Talk / SMS 08105737966

Read - www.ingeniousinvestor.blogspot.com

Follow us - www.twitter.com/smartinvestor