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IT stocks relief rally looks overdone

IT stocks relief rally looks overdone
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First Published: Thu, Sep 29 2011. 11 26 PM IST

Updated: Thu, Sep 29 2011. 11 26 PM IST
Information technology (IT) stocks have done well in the past two weeks, climbing by about 11% from their lows in mid-September compared with a mere 1.5% rise in the benchmark Nifty of the National Stock Exchange. The European markets have done well during this period on the hope that governments will work towards tackling the region’s debt woes.
It’s natural that IT stocks should rally on such hopes. After all, they had fallen more than 30% between January and mid-September, higher than the 20% decline in the broader markets, due to concerns that the debt crisis in Europe would result in a slowdown in the global IT demand.
Regardless of what current stock prices convey, it’s too early to say these concerns are behind us. Having said that, it does look like the current macroeconomic situation will not affect the immediate September quarter results, if the performance of Accenture Plc is any indication.
The US-based technology firm, which competes with Indian IT services firms in some areas, reported strong results for the quarter ended August. Accenture follows a September-August fiscal year. Revenue grew by 14% year-on-year in local currency terms in the fourth quarter, not much lower than the 15% growth it managed in the rest of the year.
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More importantly, it reported new order bookings of $8.4 billion (over Rs 41,000 crore today), the highest in three quarters. Outsourcing bookings accounted for about 51% of the total bookings and were the highest in over seven years.
The management commentary was also positive, “Clients continue to invest in replacing their core systems and initiating more cost-reduction projects and in improving operational effectiveness… The challenges of globalization, increased regulation and the need for operational efficiency are even more prevalent today than they were a few months ago… Our clients continue to take steps to adjust to this new environment and this continues to drive demand for our services.”
Not surprisingly, IT stocks outperformed the markets on Thursday. But things seem a bit overdone now, at least in a few counters. Infosys Ltd, for instance, has risen by 16% from its low in mid-September. This gives the impression that the industry is out of the woods, while that’s clearly not the case. And it doesn’t make sense to get excited about Accenture’s quarterly results.
There’s weren’t many concerns about the near-term growth prospects. And while some of Accenture’s work overlaps with that of Indian vendors, the correlation in demand isn’t that high, given the high proportion of consulting work Accenture does.
IT stocks had underperformed the markets earlier because of concerns that demand may get affected in the second half of the year and in the next fiscal year. These concerns haven’t disappeared. Even Accenture’s guidance for the next fiscal year builds in some caution for the second half.
Investors need to keep these factors in mind before getting carried away with the recent rise in IT stocks.
Graphics by Ahmed Raza Khan/Mint
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First Published: Thu, Sep 29 2011. 11 26 PM IST
More Topics: Mark to Market | Mobis Philipose | IT | Nifty | Stocks |