Mumbai: Buoyed by hopes of a recovery in demand for information technology (IT) services, Indian IT stocks have surged since the start of the last earnings season, or 10 July, prompting institutional investors and brokerages to revise their ratings from “reduce” and “sell” to “neutral” and “buy” with higher price targets.
The renewed interest in IT counters can be gauged from the gains in the Bombay Stock Exchange’s sectoral index, BSE-IT, which has outpaced the benchmark Sensex index.
The sectoral index has gained 37.6% since 10 July while the Sensex has risen only 22% over the same period. Collectively, companies in the BSE-IT have gained Rs1.19 trillion in market capitalization, or 42.2%, between 10 July and 15 September.
Analysts and industry executives say that while the worst seems to be over for the IT sector, the buoyancy reflects not current growth, but hopes of growth, however weak, two or three quarters down the line.
“(The) current market rally in the IT stocks may be a little ahead of consensus, but it is clear that the worst is behind us,” said Tarun Sisodia, director (research) at Mumbai-based institutional investment firm Anand Rathi Financial Services Ltd, which has a “buy” recommendation on all companies in the BSE-IT index.
Surjeet Singh, chief financial officer (CFO) of Patni Computer Systems Ltd, expects a recovery in IT demand only in the middle of 2010.
However, he said that earnings growth rates of Indian IT firms may halve from the 35% levels seen in the past because of the large changes in the banking and financial services industry in the US, which had driven much of that growth. Many US financial firms collapsed, merged or were taken over by the government during the turmoil in the US banking industry.
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The fundamentals for IT firms haven’t changed much yet, analysts said. Sales revenue at top Indian IT services firms Tata Consultancy Services Ltd (TCS), Wipro Technologies and Infosys Technologies Ltd has been either falling or changed little since the quarter ended December 2008 through the one ended 30 June.
Some analysts at foreign institutional investment banks such as BNP Paribas continue to be conservative, especially when it comes to large-cap firms such as TCS, Infosys and Wipro, as their stock “valuations are already more than adequately factoring in their market share resilience and cost management advantages”.
However, profit margins at most large IT firms have improved, largely because of drastic cuts in hiring or, in some instances, letting go of people, besides improving efficiency.
“Price reductions (billing rate negotiations) as well as volume declines (new work volumes) have stopped and the companies have become leaner and more efficient, so more poised to take advantage of growth when it happens. Our thinking is to get in before that growth phase begins,” Sisodia said.