Investors shrug off IT sector doomsday predictions

Growth may have fallen off the cliff, but investors are clearly not seeing this as the end of the world


Investors in information technology, or IT, continue to value top IT stocks at 17-18 times estimated earnings for FY17, reflecting a view that growth will come back after a hiatus. Photo: Mint
Investors in information technology, or IT, continue to value top IT stocks at 17-18 times estimated earnings for FY17, reflecting a view that growth will come back after a hiatus. Photo: Mint

Indian IT companies reported among the weakest set of results in the September quarter. In what is traditionally a seasonally strong period for the sector, large companies such as Tata Consultancy Services Ltd (TCS) and Wipro Ltd reported either flat revenue or a decline compared to the June quarter. Ahead of the earnings season, analysts had warned that investors should brace for what is likely to be the weakest performance since the global financial crisis.

But things turned out to be far worse than expected, especially in the case of TCS, where revenues were far below expectations, and Mindtree Ltd, which reported a 3% sequential decline in revenue.

Still, IT stocks have done fairly well since the results season began. Shares of TCS, Wipro and HCL Technologies Ltd have risen between 3.5% and 4.5% since 14 October, beating the 1.4% rise in the Nifty during the period. Infosys Ltd has fallen by 1.2%, despite the fact that the company clearly beat all of its peers in terms of growth last quarter. But investors seem to be worried about its weak guidance about the rest of the year, although it must be noted that Infosys appears to have been overly conservative with its guidance.

Overall, IT results and the post-results commentary gave enough reasons for worry. But on the contrary, IT investors seem to be cheering the results. What gives?

Of course, there are different factors at play with each of these stocks—for instance, investors seem to be excited with Wipro’s bold acquisition moves, despites its continued weak performance on the revenue growth front. With HCL Tech, growth met the Street’s expectations, thanks to continued strength in its infrastructure management services practice. HCL Tech’s margins have turned out to be better than expectations for two quarters in a row, which has come as a relief as well.

As pointed out in this column earlier, the rise in TCS shares is a mystery, especially since its revenue growth of 1% was far lower than expectations. But investors’ reaction to the company’s results is symptomatic of the overall approach to IT sector allocations in portfolios.

Growth may have fallen off the cliff, but investors are clearly not seeing this as the end of the world. They continue to value top IT stocks at 17-18 times estimated earnings for FY17, reflecting a view that growth will come back after a hiatus. Besides, these companies generate strong cash flow and have increased payouts to shareholders in recent years.

Of course, this resilience will be tested if growth continues to slip in the coming quarters.

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