Analysts Positive On IT Stocks Despite Around 30% Return So Far This Year
With the rupee still not far from its all-time low, IT investors have all the more reason to cheer. The rupee on August 16 closed at a record low of 70.15 against the greenback, in line with emerging market currencies that followed a plunge in Turkish lira on US trade-related concerns. While currency markets have had few bouts of support with easing concerns on US-China trade talks, the dollar still continues to pressurise currencies including rupee. But weakness in the rupee boosts profitability for exporters such as IT companies. Despite around one-thirds return year-to-date, analysts see further upside in IT stocks for the remaining part of the year.
"We feel rupee-dollar can hit 72-75 as we near election 2019 so IT and pharma can likely outperform market from here also," AK Prabhakar, head of research, IDBI Capital Markets, told NDTV.
The Nifty IT - the NSE's sectoral index comprising technology stocks - has risen more than 28 per cent year-to-date. The BSE IT has moved up 32 per cent during this period. That marks significant outperformance compared with a 9.9 return on the Nifty 50.
The rupee is down 9.3 per cent against the dollar so far this year. It has depreciated around 5 per cent against the euro. The US and Europe markets drive most of revenues for major Indian IT companies.
In 2017, the NSE and BSE IT indices had returned 12.2 per cent and 10.8 per cent respectively, while the rupee appreciated nearly 6 per cent against the greenback.
"IT still has room to rally," said Mr Prabhakar, who likes Cyient, Tata Elxsi, HCL Tech and TCS from a long-term perspective.
Analysts are also positive on major IT companies' emphasis on the digital segment and upbeat commentary in the June quarter.
Sachin Relekar, fund manager-equity at LIC Mutual Fund AMC, is also positive on the IT sector. "Indian companies have diversified into more lucrative digital segments such as AI (Artificial Intelligence), cloud computing, etc. Management commentary across the companies is reflecting the same. Coupled with this, large cap companies are committed to returning significant share of cash flows to their shareholders," he told NDTV.
"Growth, a key element, was missing in IT sector in general for the past 2-3 years. Hence the price to earnings ratios had contracted for most of these companies... The last 2-3 quarter has seen growth returning, larger deal-wins happening, management turning positive and companies announcing buyback," Prasanna Pathak, fund manager, Taurus Mutual Fund, told NDTV.
TCS, the country's largest IT services exporter, in June announced a share buyback worth Rs 16,000 crore. HCL Tech next month said it would buy back share worth Rs. 4,000 crore.
"So the returns in the last 2-3 quarters are a combination of earnings growth and PE re-rating."
Going forward, analysts suggest IT investors to watch management commentaries, deal wins and rupee movement closely.
"Since most of the revenues are generated from US and Europe, events in these areas and business confidence are important. Also, how the landscape changes and how the transition from linear to non-linear model evolves and then which companies are able to monetise needs to be watched. Lastly, the rupee and other cross-currency movements are important." Mr Pathak added.
Having a positive outlook on IT, he sees the possibility of further re-rating in the sector in near to medium term.
