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IT stocks resilient, most stocks up 2-5%

Positive result and outlook coupled with Rupee depreciation are sentiment boosters
Most IT stocks are up big in the first hour of trading following positive results from the likes of Mindtree, Cyient and TCS. Amongst the large caps, TCS lead the pack, up ~5% while Infosys is almost up ~4% with days high of Rs1,178. HCL Tech and Tech Mahindra are up~3% each, while Wipro is seen up ~2%. Cyient has lead the way, almost up 7%, while Mindtree and Hexaware were up ~3% each.

The positive sentiment is believed to be a reflection of strong set of numbers posted by TCS, which was topped with management guidance turning slightly positive (although cautious) on North America BFS. Cyient’s commentary too was on the positive note with highlight being the continued growth momentum across verticals. Mindtree’s strong performance is an indication that the company is on the track to post robust growth in FY19 and that the client specific issues are a thing of the past. Infosys has managed to pare losses seen post Q4FY18 results, which were actually on the positive side but management guidance on 100bps EBIT margin correction in FY19 had sent the stock to Rs1,100 levels.

An added tailwind for the sector that has resulted in this positive reaction is that USD/INR has crossed the Rs66 mark. We believe that this would definitely aid the overall pact in margin defence if not aid margin expansion. The management commentaries of majority of the companies have indicated that FY19 is well placed in terms of growth vs. FY18, fuelling the positive sentiment in the IT stocks.

We are positive on the sector and have Infosys and HCL as our preferred picks in the Large cap space. Infosys’ performance vs. TCS in FY18 was almost on par yet it trades at ~20% discount to TCS. Further, TCS is expected to outperform Infosys in FY19 on account of ramp up in large deals but we expect that performance deltas to converge in FY20. HCL Tech trades at an attractive valuation and would benefit from its investments in IPs and capabilities in ER&D space. Amongst midcaps, we like Cyient, Persistent Systems and Mphasis owing to higher eranings growth vs. overall sector.