IT (information technology) stocks, after underperforming the broader market for almost two months, got a boost when technology companies Accenture Plc and Oracle Corp. reported better-than- expected quarterly results late last week. The National Stock Exchange’s CNX IT Index rose by 4.1% last Friday, a day its benchmark Nifty rose by 2.4%.
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Accenture reported a healthy 20% year-on-year growth in its consulting business, as well as a strong trend in order booking. Clients are investing in cost rationalization, customer acquisition and retention, Web development and deploying new technologies in the wireless market.
As analysts at HSBC Research point out, “Growth in consulting revenues is a clear testimony of clients investing in new growth initiatives and not just cost cutting.” Of course, the increase in discretionary spending is not a new trend.
But Accenture’s results show that the trend is continuing and is likely to drive growth for Indian IT services firms as well. HSBC analysts also point out that the growth trends in the telecom business have been improving in the past few quarters. Accenture increased its revenue growth guidance for the whole year to 11-14% from 8-11% at the end of the previous quarter. Also, Oracle reported a 34% increase in sales of application licences, which is a positive indicator for Indian IT firms.
The IT index has done extremely well since the market recovery began in March 2009, rising by as much as 243%, compared with an increase of 120% in the Nifty during the same period. Of course, this was partly to make up for the underperformance during the credit crisis.
With a high exposure to the US markets, which was at the centre of the crisis, a number of investors had gotten rid of their IT holdings. In fact, between March 2007 and now, IT shares have underperformed the broader markets by about 12%. This is despite the recovery in the US economy and the resurgence in demand for IT services. But with positive news continuing to come out of the US market, this should soon be undone.
A reason the rally in IT stocks ran out of steam earlier this year was the rich valuations of top-tier firms. While valuations continue to be high, the IT sector seems to be among only a handful where news flow is likely to be positive in the near term. Therefore, it may outperform, just because of a lack of decent alternatives in the market.
Graphic by Yogesh Kumar/Mint
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