Mumbai: BSE Information Technology index is at a 15-month high, driven by support from weakening rupee and comfortable valuations. The index, which has been underperforming the benchmark due to various reasons, including H1B visa and pricing issues, has risen 5% this year. In contrast, BSE Sensex and Nifty have climbed 25-26% in 2017.
According to Shibani Kurian, senior vice-president and head of equity research, Kotak AMC, technology stocks have seen some support on the back of higher oil prices, leading to some expectations of rupee depreciation.
A cheaper rupee translates into better export earnings. The Indian rupee on Wednesday weakened for the third consecutive session to hit a two-week low against the US dollar in opening trade. So far this year, the rupee has gained 4.25%.
Another factor that is building up an appetite for beaten down IT stocks is valuations which look reasonably priced, said analysts.
Mayuresh Joshi, fund manager, Angel Broking Ltd, said that IT headwinds seem to be phasing, though the issues are not behind us. He said as valuations of the broader markets look stretched with weak earnings outlook, defensives like IT stocks come to the limelight. “After the severe downfall, IT stocks are under-owned and offer better valuation comfort which is making the sector attractive once again," he added.
BSE Sensex is currently trading at a price to earnings (PE) ratio of 21.78 based on FY19 earnings, while BSE IT index is available at 16.24 one-year forward PE.
However, Indian IT services sector continues to face challenges on the core operating front, both cyclically as well as structurally. “On a cyclical basis, global demand for IT services remains subdued especially in large verticals like banking and financial services and retail and in geographies such as North America. Further, there has not been any change in management commentary regarding the outlook for H2FY18," said Kurian.
Earnings growth is still elusive for IT companies with continuous downgrades. According to Bloomberg, BSE IT index consensus earnings per share (EPS) forecast for the current financial year has been cut by 5.2%% since April and by 6.2% for the next year.
Among large-cap IT stocks, Infosys Ltd slipped 2.6%, Tata Consultancy Services Ltd gained 16.91%, Wipro Ltd jumped 28.02%, while HCL Technologies Ltd was up 7.9%.