Negative sentiment for IT stocks3 min read . Updated: 13 Sep 2007, 12:45 AM IST
Negative sentiment for IT stocks
Negative sentiment for IT stocks
Software stocks have been among the worst performers in the recent recovery in Indian markets .
The National Stock Exchange’s CNX IT index has recovered just 2.9% from its lows in August, while the Nifty has risen by 10.4%. The worry now isn’t restricted to the subprime crisis. Indeed, almost all top-tier companies have ruled out any impact of the subprime crisis on revenues or profit, given their minuscule exposure to mortgage players in the US.
Incremental data coming from the US have given rise to fears of a recession in the chief market for information technology outsourcing. Analysts haven’t yet ventured into hazarding how much of a hit that would have on earnings estimates. But if there were a recession in the US, the impact would be huge since both pricing and volumes will be affected. What has made things worse is that IT companies have to also contend with a 10% year-on-year appreciation in the rupee.
As of now, the markets seem to grappling with the possibility of a slowdown in the banking and financial sector, the maximum revenue generator for most Indian software firms. A slowdown in the banking and financial sectors is expected to hit growth estimates for fiscal 2009 by 5-7% (fiscal 2008 estimates are expected to be met since the impact, if any, would begin only towards the end of the year).
Thus, for instance, Infosys Technologies Ltd’s earnings per share estimates for fiscal 2009 would fall from around Rs98 to Rs92. At current levels of Rs1,822 a share, Infosys trades at a forward multiple of about 20 times, assuming earnings have to be adjusted for a slowdown in the banking and financial verticals. This looks reasonable going by historical benchmarks. Also, if the slowdown is restricted to one vertical, there is a good chance that other segments can make up (with a time lag) and growth would return to current levels. But the edginess in IT stocks suggests that investors don’t want to be caught on the wrong foot in case of a slowdown in the entire economy.
A recent Citigroup report says only 20-30% of IT budgets involve discretionary spends, and even if budgets weren’t increased, Indian outsourcing companies would continue to post decent growth rates. This is simply because the proportion of offshore work keeps increasing. But the key risk is if IT budgets are curtailed, that would hit both volumes and pricing. There would be clarity on that only in the next few months.
Meanwhile, as one analyst who did not want to be quoted puts it: “The sentiment for IT stocks has turned negative. Even if one sees value at current levels, it may not make sense to enter until the mood changes."
Two-wheeler maker TVS Motors Ltd’s shares were already defying gravity this fiscal, performing in line with (when not better than) peers Hero Honda Ltd and Bajaj Auto Ltd until mid-August, despite a much sharper drop in its sales. But matters have gotten worse in this regard: TVS shares have outperformed Hero Honda and Bajaj Auto by 22% and 20%, respectively, since the beginning of the current fiscal.
Since April, TVS Motors’ motorcycle sales have fallen 37%, compared with a 10.7% decline in Bajaj’s motorcycle sales and a 1.5% drop in Hero Honda’s sales. The markets are clearly betting on future performance as no good is expected to come of results in financial year 2007-08. Apart from lower sales, the company has to contend with the double hit of higher interest and deprecation charges. Some analysts expect net profit to contract by a third this fiscal. It’s important to note here that profit had already fallen 43% in the year till March 2007. And despite the expected drop in earnings, TVS shares trade at trailing valuations of 32 times.
Towards the end of last month, the company rolled out seven new products of which four were in the two-wheeler space. The most significant among them, a 125cc motorcycle called Flame, is at the middle of a controversy with Bajaj Auto. The markets, interestingly, have brushed these uncertainties aside.
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