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IDBI Capital on why midcap IT stocks surged today

With a second quarter seeing a better than expected performance, the full year outlook should also improve for HCL Tech, says Urmil Shah, Vice President & Research Analyst, Institutional Equities.

If HCL Tech is giving good guidance or is seeing 1%-2% extra growth than what they had earlier seen, why are other midcap IT names going up?
We have to keep in mind that HCL Tech had earlier given a guidance, one of the few companies which had given the guidance at the end of Q1. It was not expected that immediately in the second quarter, there would be an improvement in the business momentum versus what they had guided for. So to that extent, I believe there is a positive surprise both on the revenue growth point of view because we had factored 2.3% QoQ growth for the second quarter as well as EBIT margin upwards of 20.5%.

That is also higher than what we had factored in. So there is a dual upbeat versus expectation and my read through will be this means their outlook regarding the peaking for the second half remains and with a second quarter seeing a better than expected performance, the full year outlook should also improve. So, we were expecting a 1.7% decline in revenue for the full year.

I would not be surprised given what the commentary is for the second quarter and they might actually end up reporting a positive growth for the full year. So I believe there was a dual surprise which came in and was not really expected at this point of time. The timing is also a positive surprise.

Now coming to the other midcaps also doing well, if we see the stocks which are doing well while the entire sector is burning, there are a few stocks which are seeing double digit growth. Mphasis is one. So both these companies have been doing relatively better compared to the peers since the last three to four quarters and even in Q1, they had continued to do relatively better than others. As regards high quality stocks in the midcap space, both these companies qualify. They also have been doing very well as compared to their other midcap peers.

Let us talk about the Infosys acquisition though considering the size of Infosys, the acquisition is not big. In times of growth, even if you do acquisition, marginal upgrades do matter?
We believe that not just the acquisition announced today, Infosys has been planning for capability enhancement rather than geographic growth or revenue growth. I believe whenever there is capability enhancement related acquisition, there remains a strong opportunity to scale it up, given Infosys’s strong client portfolio. I believe the recent acquisitions of GuideVision and Kaleidoscope are quite positive because they will lead to profitability enhancement and would not have a meaningful impact on financials.

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