Home >Market >Stock-market-news >IT stocks back in favour on weak rupee, cheap valuations

Mumbai: Of the 10 top-performing BSE 200 companies, five are from the information technology (IT) sector, signalling a revival in the Indian software services industry on the back of an improving US economy and a depreciating rupee, besides relatively attractive valuations.

“It was an underperforming sector. Now, given the market dynamics, it has become a sought-after defensive bet," said Harsha Upadhyaya, chief investment officer-equity, Kotak Mahindra Asset Management Co.

Leading the pack were mid-cap IT stocks such as Mindtree Ltd, Larsen and Toubro Infotech Ltd, Mphasis Ltd and Tech Mahindra Ltd, besides sector leader Tata Consultancy Services Ltd (TCS). The company stocks posted between 34.2% and 61.6% returns.

“Over the past six months, mid-cap IT companies have handsomely outperformed the benchmark index. The demand environment is improving in their biggest market, the US, with the world’s largest economy firing on all cylinders," said Ajay Bodke, chief executive and chief portfolio manager at brokerage firm Prabhudas Lilladher Pvt. Ltd.

“Mid-cap IT companies have grown in double digits off late, and guidance for FY19 is also in early-teens," said Bodke. He added that the good show was triggered by a shift in focus towards new-age, high-margin services such as digital, analytics, intelligence and internet of things (IoT). “A weakening rupee has also been a big positive for them."

The rupee has depreciated 5.84% year-to-date and currently trades at 67.83 against the dollar. A depreciating rupee translates into higher revenues in rupee terms for the export-focused software companies.

Others seem to agree. “The US economy is showing steady improvement and this eventually means there is going to be better demand for our IT companies from their top verticals such as BFSI (banking , financial services and insurance), retail and manufacturing, as these sector are likely to spend more," said Gaurav Dua, head of research, Sharekhan by BNP Paribas. “Weakening rupee and attractive valuations are added pluses."

The BSE IT index had gained 10.8% in 2017, compared to the Sensex’s 27.9%. Year-to-date, it has gained 20.8% compared to the Sensex’s 4.8%. The BSE IT index trades at 18.46 times its one-year forward earnings, and even as its valuation has risen since December 2017, it looks more attractive as the visibility of earnings is much better than it was last year.

Domestic mutual funds snapped up shares of technology companies among other top large-cap stocks in May, supporting the market in a month that saw continued exit of foreign investors.

If we look at the top 20 in the pack, consumer-focused stocks and financials form a major chunk, reiterating the faith in India’s consumption and economic growth story.

“After the two exogenous shocks to aggregate demand – demonetisation and the GST (goods and services tax), the aggregate demand has bounced back, which is reflected in consumer retail names," said Bodke. “Especially, rural demand has picked up strongly."

Upadhyaya of Kotak Mahindra AMC, agrees: “The consumption story continues to be very strong, and that has driven pure consumption stocks, as well as enablers of those consumptions such as retail-focused financials."

“What underpins is consistency in performance and pristine asset quality," said Bodke, referring to companies such as Kotak Mahindra Bank Ltd, Bajaj Finance Ltd and Cholamandalam Investment and Finance Co. Ltd.

The top-performing stock for the year, however, was Indiabulls Ventures Ltd, with the stock gaining 85.3% to 491.75. The performance comes on the back of a stellar 1,192.46% rise in 2017.

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