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Although the IT sector is viewed as a defensive play, there are several stocks even from the frontline pack that are available at reasonably attractive valuations despite their scorching run on the bourses.
Given that software is one of the few sectors with a fair degree of earnings visibility — especially as most other sectors are reeling from a sluggish domestic economy — it is an investment option that is likely to pay off over the medium to long term of 3-5 years.
A relatively weak rupee at ₹60 levels and expectations of increased spending by clients in the developed economies are positives for the IT sector. The industry is expected to grow by 13-14 per cent FY15. Most stocks in this space trade at 12-15 times forward earnings, which is cheaper than the broader markets or the valuation multiples of blue-chip indices.
At the moment, it would be good for investors to take the fund route for exposure to the software sector’s potential. Although sector funds are a bit risky, investments in small instalments as diversifiers can add to their overall returns. The ICICI Pru Technology fund is a good option.
Over one-, three- and five-year timeframes, the fund has outperformed its benchmark (BSE IT) convincingly — to the tune of 4-9 percentage points over the long term. In the last five years the fund has managed to deliver over 25 per cent annually, while over a 10-year period it is 21 per cent, which compares favourably with even the best of funds from the diversified category. It has bettered peer funds such as Franklin Infotech and SBI IT.
Portfolio and strategy
The fund holds a handful of 10-15 stocks across market cycles. Infosys and Wipro figure prominently in it.
It has also latched on to market outperformers such as Tech Mahindra, Mindtree, eClerx Services, Cyient and Persistent Systems.
It is however surprising to note that TCS and HCL Technologies are not in it. They may be a bit heavily valued at the moment, but are easily the best in terms of financial growth in the Indian IT space. But despite this exclusion, the fund has been able to outperform through exposure to the mid-cap IT pack.
The ICICI Technology fund thus seems somewhat anchored to valuations.
It also maintains a stable portfolio; in the past few years it has exited only Hexaware Technologies, as the company grew at a slower-than-industry pace. Companies on the revival path such as NIIT and Sasken Communication have found place in it.
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