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NEW DELHI: The BSE IT index has outperformed the Sensex by nearly 10 per cent so far in the year as compared to less than 1 per cent gain in the benchmark index.
The sharp gains in the IT stocks are largely on account of improved growth outlook for FY14 from the US and rupee depreciation, Kim Eng said in a report.
According to the research firm concerns over the impact of the US immigration bill still weighs on the sector. We expect significant changes, especially in the outplacement clause, which does not allow companies with more than 15% of its US employees on H1B visa to work at its client's location (onsite), said Kim Eng.
Tata Consultancy ServicesBSE -0.44 % and HCL TechnologiesBSE -0.56 % are Kim Eng top picks in the sector which have rallied over 22 per cent and 29 per cent so far in the year 2013 as compared to nearly 10 per cent rise in the BSE IT index and nearly 0.5 per cent gain in the Sensex (intra-day).
In the mid-cap IT space, KIM Eng is positive on Persistent Systems (PSYS) and CMC (CMC).
Given that demand outlook in the US is improving and INR depreciation is here to stay, Kim Eng expects the IT Index to continue to outperform the SENSEX atleast in near term.
According to analysts, the headwind in the sector still persists with the kind of developments that will take place on the immigration bill and its possible impact on earnings of IT companies.
"Despite the headwinds, we still feel that the margins might get propped up a little bit better in this quarter, Infosys might post margins of 26-27%, TCS might have flat margin because of the wage hikes," said Mayuresh Joshi, VP, Institution, Angel Broking in an interview with ET Now.
"In the mid-cap space we like Tech Mahindra and KPIT Cummins where we feel that the revenue growth can be anywhere between 22-25%," he added.
For the sector, Q1 has been a mixed bag with rupee depreciation on the positive side and the US senate passing the immigration bill on the negative side, at least from the current perspective.
Kim Eng expects software companies to confirm the improved outlook for FY14 when they declare their 1Q results and expect the sector to outperform in FY14.
In the near term analysts feel that the sector might down by global headwinds but appears promising for long term buys.
"In the near term we may not see much improvement, but on a long term basis both TCS and Infosys are still good businesses to back and if the currency depreciation helps in the long term that also should be a very positive factor," said IV Subramanium, Quantum AMC in an interview with ET Now.
"Infosys specifically had some issues in the near term, but we still like the business and are positive on its prospects," he added.
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