Infotech stocks take wing despite a muted outlook, IT gets major share of portfolio inflows
BSE
438.00
-0.95 (-0.22%)
Vol:9588 shares traded
NSE
437.50
-1.80 (-0.41%)
Vol:51277 shares traded
MUMBAI: A growing number of Indian investors are buying stocks of top
software exporters, leading to a surge in their valuations and casting
doubts over the sustainability of the rally in such stocks at a time
when the outlook for the sector is clouded.
Over the past three months, India has attracted over $13 billion of portfolio flows. The movement of various sector indices during this period indicates that the IT sector has benefited the most from these foreign fund flows. In these three months, the ET Infotech Index has gained 22% -- the highest among ET sectoral indices. And it comes at a time when two out of every three ET sectoral indices have posted negative returns.
Due to higher investor interest, two of the top five locally-listed IT exporters, including TCSBSE -0.01 % and HCL TechnologiesBSE -0.38 %, are now trading near their all-time highs. The remaining three -- InfosysBSE 0.09 %, WiproBSE -0.22 %, and Tech MahindraBSE 0.09 % -- are near their 52-week high levels.
The surge in IT stocks is largely driven by expectations of stronger demand and relatively better IT budgets. However, current earnings forecasts by analysts and sector experts are yet to signal any significant recovery. This has resulted in higher price-earning multiples as stock prices have surged but earnings forecasts have not.
What could have also prompted flighty investors to load up on stocks of the top IT firms is a relative lack of investment options owing to the economic slowdown and lack of fresh capital investments. Investors have also been attracted to the sector because exposure to such firms help cushion the impact of a slowing domestic economy.
"More allocation has happened in the IT segment. The domestic economy is not doing well, which is likely to keep the rupee weak against major hard currencies. This and the expectation of a recovery in the US market have boosted IT stocks," said Ashish Chopra, IT analyst, Motilal Oswal Securities.
According to Credit Suisse,
while the degree of demand pickup varies and a significant acceleration
is not yet visible, the trend is clearly positive. "Earnings upgrade
driven by a pickup in corporate IT budgets could potentially lead to a
re-rating of earnings multiple," it said in a report.
Analysts are betting on the possibility that demand will be upbeat in 2013 compared to a year ago. Recently, technology research firm Gartner forecast a 5% increase in global IT services expenditure compared to the anticipated 2% increase in 2012. Nasscom's forecast at 12-14% jump against 10% growth in FY12 appears promising. "The US tech spend was restrained in 2012. This is expected to reverse given encouraging numbers on macroeconomic parameters such as unemployment claims," said Rumit Dugar, IT analyst, Religare.
Against the backdrop of this optimistic scenario, Cognizant's lower growth guidance comes as a surprise. The country's second biggest IT company by revenue, which is listed on the Nasdaq, expects revenue to grow at a slower pace of 17% in the current year compared with the 20% growth in 2012. This shows the demand-side pressure as the US and European economies struggle to resume growth.
According to Motilal Oswal's Chopra, a near-term consolidation may be in the offing and IT stocks may trade sideways. "The March 2013 quarter is expected to remain weak for IT firms. This may result in an underperformance of IT sector indices compared with other sectoral indices."
Over the past three months, India has attracted over $13 billion of portfolio flows. The movement of various sector indices during this period indicates that the IT sector has benefited the most from these foreign fund flows. In these three months, the ET Infotech Index has gained 22% -- the highest among ET sectoral indices. And it comes at a time when two out of every three ET sectoral indices have posted negative returns.
Due to higher investor interest, two of the top five locally-listed IT exporters, including TCSBSE -0.01 % and HCL TechnologiesBSE -0.38 %, are now trading near their all-time highs. The remaining three -- InfosysBSE 0.09 %, WiproBSE -0.22 %, and Tech MahindraBSE 0.09 % -- are near their 52-week high levels.
The surge in IT stocks is largely driven by expectations of stronger demand and relatively better IT budgets. However, current earnings forecasts by analysts and sector experts are yet to signal any significant recovery. This has resulted in higher price-earning multiples as stock prices have surged but earnings forecasts have not.
What could have also prompted flighty investors to load up on stocks of the top IT firms is a relative lack of investment options owing to the economic slowdown and lack of fresh capital investments. Investors have also been attracted to the sector because exposure to such firms help cushion the impact of a slowing domestic economy.
"More allocation has happened in the IT segment. The domestic economy is not doing well, which is likely to keep the rupee weak against major hard currencies. This and the expectation of a recovery in the US market have boosted IT stocks," said Ashish Chopra, IT analyst, Motilal Oswal Securities.
 |
Analysts are betting on the possibility that demand will be upbeat in 2013 compared to a year ago. Recently, technology research firm Gartner forecast a 5% increase in global IT services expenditure compared to the anticipated 2% increase in 2012. Nasscom's forecast at 12-14% jump against 10% growth in FY12 appears promising. "The US tech spend was restrained in 2012. This is expected to reverse given encouraging numbers on macroeconomic parameters such as unemployment claims," said Rumit Dugar, IT analyst, Religare.
Against the backdrop of this optimistic scenario, Cognizant's lower growth guidance comes as a surprise. The country's second biggest IT company by revenue, which is listed on the Nasdaq, expects revenue to grow at a slower pace of 17% in the current year compared with the 20% growth in 2012. This shows the demand-side pressure as the US and European economies struggle to resume growth.
According to Motilal Oswal's Chopra, a near-term consolidation may be in the offing and IT stocks may trade sideways. "The March 2013 quarter is expected to remain weak for IT firms. This may result in an underperformance of IT sector indices compared with other sectoral indices."
BY SHIV KUMAR
PGDM 2nd
No comments:
Post a Comment