Earnings gains draw investors to IT stocks

Earnings gains draw investors to IT stocks

Mumbai: Institutional investors are increasing their holdings in Indian information technology (IT) stocks, boosted by a recovery in demand that has been reinforced by the December-quarter earnings of India’s second-largest IT services exporter Infosys Technologies Ltd.

In the past month, the Bombay Stock Exchange’s IT index gained 9%, outstripping the 2.85% rise in the benchmark index, Sensex. India’s top three IT firms—Tata Consultancy Services Ltd (TCS), Infosys, and Wipro Ltd—together have a 14.98% weight in the 30-stock Sensex.

On Thursday, two days after Infosys announced results that beat analysts’ estimates with a 6.8% increase in dollar revenue and raised its outlook for this fiscal, BNP Paribas Securities India Pvt. Ltd, which advises mutual funds and institutional investors, upgraded its ratings for Indian IT stocks to “overweight"—a recommendation to buy such stocks.

In the December quarter, local mutual funds, which manage Rs2 trillion in equity assets, nearly doubled their exposure to IT stocks. On 31 December, these funds had 9.44% of their diversified equity funds in large-cap IT stocks, compared to 5.5% at end June and 7.6% at end September, data from mutual fund tracker Morningstar India show.

“The IT sector has proved to be steady in terms of growth. It has done reasonably well and we continue to remain positive," said Sunil Singhania, senior vice-president (equities) at Reliance Capital Asset Management Ltd, India’s largest mutual fund.

Analysts expect TCS and Wipro to report sequential growth of 2-5% in quarterly dollar revenues. TCS will announce its results on 15 January and Wipro, five days later.

Insurance firms and foreign funds are also favouring Indian IT stocks. “This is one sector that will not be impacted by rising inflation or interest rates," said Aneesh Srivastava, chief investment officer, IDBI Fortis Life Insurance Co Ltd.

“The kind of results Infosys announced, the kind of employee ramp-up they announced, it means that things are improving fast at the ground level," said Srivastava, who has a “neutral" weight on IT stocks, an advisory to hold on to such stocks.

Foreign institutional investors, or FIIs, too have raised their holdings of large IT firms over the previous quarter, according to information provided to the stock exchanges.

For instance, FII holding in Patni Computer Systems has grown by 2.13 percentage points over a quarter ago to 12% at the end of December. MindTree Technologies saw a 4 percentage point increase in foreign investor holding to 18.52% in the same period.

“Global demand is clearly improving," Manishi Raychaudhuri, head of research at BNP Paribas, wrote in an investor update on Thursday.

“Recent data points from the IT sector and commentary by company managements indicate that the recovery in corporate spending is spreading from the banking, financial services and insurance (BFSI) space to other areas—particularly retailing, and possibly to telecom and manufacturing."

However, concerns remain over the appreciating rupee. This could drag foreign exchange earnings for Indian IT firms, which earn at least 60% of their revenue in US dollars.

In the three months to end -December, the rupee gained 3.28% to 46.53 against the dollar. In 2010, the rupee has gained 2.14% from 46.62 on 1 January to 45.62 on 14 January.

Another worry is the high valuation of IT stocks. Infosys, for instance, is trading at 24.58 times its estimated earnings for this fiscal, while Wipro trades at 25.75 times, Bloomberg data shows. In comparison, the Sensex is at 21 times its cumulative earnings per share.

Ashwin Ramarathinam contributed to this story.

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