Abhijit Bhatlekar/Mint
Abhijit Bhatlekar/Mint

Will IT stocks continue to give reasonable returns?

The sector now faces challenges of slower growth in major markets such as the US, increasing competition from multi-nationals and greater instances of offshoring through captive companies

Stocks of information technology (IT) services companies have provided reasonable returns for Indian investors. Shares of Tata Consultancy Services (TCS) Ltd and HCL Technologies Ltd have risen by around 20% annually in the past 10 years, far higher than the 8.4% return of the Nifty 50 index.

Even Infosys Ltd, which was in a rough patch for quite a few years during this period, has managed fairly healthy returns of 13.9%. Wipro Ltd, which has had a rather poor run, almost matched the broad market with returns of 8.3%.

The sector now faces challenges of slower growth in major markets such as the US, increasing competition from multi-nationals and greater instances of offshoring through captive companies.

As in the past, returns will vary going forward as well. Investors must side with companies that are versatile and are making rapid strides with emerging technologies. Of course, nearly all companies are claiming to be at the cutting edge of technology; although the proof of the pudding is in the eating.

In the recent past, most home-grown companies have faltered, while competitors such as Cognizant Technology Solutions Corp. and Accenture Plc have grown at a faster pace. Among India-listed companies, Infosys is showing good momentum, with its leadership change working wonders. Of course, investors will do well to closely watch if the company continues to do well in 2016, especially since its valuations have gone ahead of TCS based on FY16 earnings.

TCS recently showcased its prowess in digital technology, which impressed a number of analysts. However, this needs to translate into growth, and unless the company can offset underperformance in a few troubled verticals, investors will continue to have reasons to be indifferent.

HCL Technologies appears to have lost momentum; its year-on-year growth rate has halved to around 8% in the past three quarters. And there are still no signs of a turnaround in Wipro—the company’s March quarter results suggest things are getting worse. Valuations of Tech Mahindra Ltd are the most reasonable, although growth has been a concern.

Among mid-caps, Hexaware Technologies Ltd has looked promising ever since Baring Asia Private Equity Fund bought out the company’s erstwhile promoters. Growth at Mindtree Ltd, too, has been impressive, although valuations are demanding.

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