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The NSE IT index is the best sectoral performer with gains of 9 per cent and the only sectoral index to give positive returns till date in 2018 (as on February 22), as investors are chasing value these days with the overall market valuation providing discomfort to many.
Nasscom’s comment helps
The rally almost started with Morgan Stanley’s bullish outlook on IT stocks earlier and then has been followed by good or in-line performance by most companies in the December 2017 quarter, rupee breaching the $65 level recently and Nasscom’s recent cautiously optimistic comments.
It recently guided for IT services exports growth of 7-9 per cent in constant currency for FY19 as against 7 per cent likely to be achieved in FY18 and expects a better economic environment.
The rally has been mostly led by large-cap stocks such as TCS, Infosys, Tech Mahindra, Mphasis and Mindtree. Market capitalisation of 12 large-cap companies have risen 7 per cent till date this year, compared to a gain of just 3 per cent for 26 mid-cap companies. This is unlike 2017, when mid-cap IT companies significantly outperformed the large-cap ones with gains of 34 per cent, compared to 13.5 per cent in case of the latter. Large-cap companies is defined as those with a market capitalisation of more than ₹10,000 crore.
Many positives
Analysts are more bullish on large-cap IT companies not only due to their underperformance vis-a-vis mid-cap IT companies in the past and consequent attractive valuation but also due to the fact that larger companies will benefit from their presence across key markets, strong GDP growth momentum in developed economies (US and Euro Zone), US tax reforms, low unemployment in the US, rising interest rates, increased technology spend forecast from Gartner and an environment supporting growth for IT spends in the banking vertical.
While the top five information technology companies namely, Infosys, TCS, Wipro, HCL Technologies, Wipro and Tech Mahindra are the top picks of analysts, they are selective in the mid-cap space after the strong rally and like L&T Infotech, and Hexaware Technologies.
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