There is nothing defensive about the entire IT pack, going by the stupendous run they have had from March 2009 lows. Even on a one-year basis, the BSE IT index is among the top gainers having delivered over 40 percent returns in this period, with the top-tier IT companies reaching multi-year highs in terms of valuations. The BSE IT itself trades at 24 times trailing earnings, higher than the Sensex or the Nifty.
The revival was not restricted to client spends in the US and the key vertical of BFSI which is normally good news for the diversified IT pack – large and mid-tier, even niche companies focussed on manufacturing, telecom and automotive gained significantly from the pent up demand. Volumes (person-months billed) has revived for companies across board, a fact cheered by the markets.
Infosys, TCS, Wipro and HCL Technologies have delivered 35-80 percent returns over the past one year and trade at PE multiple range of 20-27 times, which is the level they enjoyed in 2007. TCS and HCL have been key outperformers over the past one-year.
But with wage hikes of 10-15 percent, a rising tax-incidence and the challenging environment in Europe (and the Euro losing ground against other currencies) mean that margin pressures exist. In this context valuations look to be in the fair to expensive zone.
Among the others in the large sized pack, Patni Computer has delivered stellar returns, while Tech Mahindra has fallen from its year-ago levels.
Mid-cap stocks still trade at a substantial discount to their larger peers at 10-15 times earnings as markets still tread cautiously in assigning them any premium. Oracle Financial , Mphasis and Rolta India have all underperformed.