IT: Clicks in parts

K Venkatasubramanian | Updated on March 12, 2018



The IT pack was a prominent underperformer in 2014, the market shift to cyclicals meant that this defensive segment was ignored. Valuations too are lower than what the bluechip and broader indices trade at.

In 2014, the BSE IT index managed to deliver just 17 per cent, a good 13 percentage points lower than what the Sensex managed during the year. Frontline stocks gave less than 18 per cent returns. Tech Mahindra was the only exception as the company, riding on above-industry revenue growth rates, returned more than 41 per cent in the year gone by.

TCS alone is trading at 23 times trailing earnings. Infosys, Wipro and HCL Technologies trade at a more reasonable 16-18 times.

The mid-cap pack had many strong performers with Mindtree, Persistent Systems, Cyient and Hexaware delivering 50-70 per cent returns. Of course, valuations are stiffer for mid-tier players, most trading at 19-23 times.

Among the top-tier players, a recovery in the US, the continuing weakness in the rupee against the dollar, and steady traction in verticals such as retail and manufacturing may ensure that a select set of stocks serve investors well in 2015. Additionally, the European business of IT companies, across sizes, has been witnessing significant traction over the last one year and is expected to continue to generate higher revenues.

Nasscom projection

While the insurance segment has been soft, the banking and financial services segments have continued to deliver for top- and mid-tier players.

Top-tier players are also increasing utilisation rates to 80-85 per cent, up 5-7 percentage points over the last one year, improving revenue traction and also optimising bench costs.

While cautionary statements have come from TCS on its prospects for the December period, HCL Technologies expects currency volatility to affect revenues significantly. These utterances have somewhat affected the sentiment surrounding IT stocks.

But it may well be a temporary phenomenon and in any case the third quarter is weak for all players. Trade body Nasscom has projected a growth rate of 13-15 per cent (in dollar terms) in 2014-15 for the IT industry. TCS, Tech Mahindra, Mindtree and Persistent Systems look set to exceed this figure.

Although these stocks trade at 18-22 times FY15 earnings, their continued outperformance justifies this premium. While investors can retain TCS and Persistent Systems and accumulate them during declines, Tech Mahindra and Mindtree can be purchased even at these levels.

Published on January 04, 2015

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