New Delhi:In our analysis of the Bombay Stock Exchange IT index's performance, we have considered two time periods-May 10 to June 14 when the market was falling and June 14 to June 21, when the market started gaining.
Research done by moneycontrol indicates that during the period of the fall, IT index's decline was the least among all indexes taken under consideration (see table below).
Similarly, during the gain period, BSE IT index has outperformed the Sensex, sharing the glory with FMCG, and Capital Goods indices. However, the metal index, which fell the most during the fall period, is sitting on top of the heap during the gain period.
Percentage Fall
The BSE IT index, which has the highest weightage in the Sensex of around 17.5 per cent, was down over 26 per cent from May 10 to June 14 whereas the BSE Sensex saw a dip of over 29 per cent in the same period.
Percentage Rise.
For the period June 14 till June 21, the BSE IT index was up 15 per cent and on the other hand the Sensex saw a pull back of 12 per cent in the same period.
The capital goods index was down by around 35 per cent from May 10 to June 14 and has regained around 15 per cent; the BSE auto index was down over 28 per cent and has moved up 12 per cent from June 14 till June 21.
The metal index saw a fall of over 40 per cent has gained almost 20 per cent; the health care index saw a fall of over 30 per cent is up about 10 per cent.
The FMCG index was down by over 30 per cent has regained by over 15 per cent in the same period.
If we compare the fall and the regain with some major BSE indices it becomes evident that IT index was not as badly hit as the other indices and at the same time the sector has been among the top performers also.
Fundamental check
When we look at it fundamentally, the performance of the BSE IT sector can be linked to the fact that the demand environment in the IT sector is expected to remain buoyant in fiscal 2007 due to increased IT spend by organizations as well as greater acceptance of the global delivery model. PAGE_BREAK
For example, Satyam is looking forward to a revenue growth of 25.2 per cent to 27.3 per cent and an earning per share (EPS) growth of 18 per cent to 20 per cent in fiscal 2007.
In case of Infosys, ASK-Raymond James, has estimated Infosys to grow revenues and profits at a Compound Annual Growth Rate (CAGR) of 31.5 per cent and 31.0 per cent respectively over FY06-08E.
One of the areas where IT stocks have got significant support is from depreciation in the rupee against the USD and the Euro.
According to experts, every 100 basis-point (1%) fall in the Indian rupee improves their profit margins by 30-50 basis points.
But IT majors Infosys and Satyam have already hedged almost $330 million and $250 million respectively at Rs 44.48 to a dollar.
Concerns
However, there are some concerns also, high attrition rate is one of the concerns in the industry. Satyam has attrition rate as high as 19.17 per cent and Wipro’s attrition for the Q4FY06 was up from 14 per cent to 16 per cent.
So it is a challenge for the companies to recruit, train and retain the employees. At the same time TCS boasts of attrition rate of less than 10 per cent.
Secondly, wage inflation affects the operating profits and the margins of the company. On an average company’s foresee a wage inflation of 12 and 15 per cent in India every year.
The other concerns would be slowdown in the in the US economy and stiff competition from other MNCs; trying to emulate the Indian business model. Strengthening rupee will also have a negative impact on the operating profits and the margins of the company.
Experts' Views
But the question here is despite the above concerns will the sector be able to lead the rally going ahead.
Rahul Mohindar of Viratechindia is of the view that technology could remain relatively stable.
"I do not think it is going to hit into newer lows although there is some room maybe about four to five per cent to go on the downside," he says.
"We are not looking at newer lows coming in stocks like Satyam Computer Services or Infosys Technologies. The bottoms they made about a week or two back should hold on and one should possibly invest in lower," he added.
On the other hand, PN Vijay, Investment advisor,"I do not think technology sector will take leadership at any point. I continue to believe that local investment spending drives this bull market in India, unlike the last one, which is where the leadership is with capital goods and construction."
He added that technology is much more attractive than it was ever before in terms of PE multipliers and earnings growth however it does not have the flavor of 8 per cent growth.
"It is still too much into US capital spending so at best it will be a good market performer. It is not to say that there are too many lovely companies there but incrementally people will still buy the Indian economy stocks," analyst said.
Dilip Bhat, Prabhudas Lilladher feels that technology appears to be defensive at current level and at the same time, the way the rupee is threatening to go down, will also give a lot of comfort.
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Frontline IT stocks in demand
Lets take a closer look at some of the frontline tech stocks; from May 10 to June 14 Infosys corrected by 20 per cent has regained 12 per cent from June 14 till June 21.
Satyam, which lost 34 per cent has also moved up by 14 per cent, Wipro slipped 25 per cent has again moved up by eight per cent and TCS was down 25 per cent has regained nine per cent.
Frontline IT stocks which come at a high premium are among the preferred ones by some of the fund houses and are recommended by the experts also.
For instance, Mirae Asset Management’s India Discovery Fund as on June 15th had Infosys & TCS in its top 5 holdings. Its highest exposure is in the IT sector.
Technical Analyst, Ashwani Gujral says, "Infosys, Satyam bounced from very strong supports. Satyam could head up to Rs 720 from here. I am talking about the market that continues to pullback."
Sanjay Dutt, Quantum Securities says, "In technology sector my first reference would be Infosys Technologies because when one see weaker sectors going back up, one will see the strongest ones doing well."
Rajesh Jain of Pranav Securities said, "TCS is certainly a valuable company in the IT space. The volume growth looks very robust, seven to eight per cent."
He added,"The BPO is really roaring, we just heard that Mr Ramadorai talked about greater than 4,000 plus recruitment of business.In terms of business volume growth, there are absolutely no question marks."
Margins have been a bit of a question mark in this company largely due to personal cause. But they were working on it and the numbers have successfully improved on a quarterly basis.
"Despite certain question marks on what could happen to orders arising out of US and Europe, I do not think any reason for the kind of decline that we have seen in the stock. Stay with it; the investors should not really have to worry about it," said Jain.
These stocks, which were trading at a higher Price Earning (PE), are now available at significant discounts. Satyam, which was trading at a PE of 20 times on May 10, is now available at PE of less than 18.
TCS and Infosys are available at a PE of 29.5 and 32 respectively. They were trading at a PE of around 36. Wipro is currently trading at a PE of 20 as compared with 25 on May 10.
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