Equity fund managers press 'pause' on IT stocks

Await quarterly performance and companies' commentaries

With information technology (IT) giant Infosys set to announce its earnings for the quarter ended September in just ten days, India’s equity fund managers have adopted a wait-and-watch policy. And, they don’t mind reducing their exposure slightly in a few IT counters that have risen significantly.

The cautious stance comes at a time when the allocation of equity assets to IT shares stands at 14 per cent, the highest in several years. With the first government shutdown in the US since 1996, investment managers are taking no risks in further increasing allocation to software exporters, the shares of which have rallied as much as 75 per cent so far this year.

“This is not a hedge, but a cautious approach. Currently, no other sector is better enough to provide a hedge against IT. Though we are not expecting the September quarter to be a bad one, we chose to halt our buy calls on IT shares for the time being,” says the chief investment officer of a foreign fund house. He added markets were somewhat sceptical about Infosys.

Since the beginning of this financial year, the appetite for IT stocks has been rising, as western markets came up with positive data points. This made fund managers almost double their IT allocations through the last few months. And, the strategy clicked for them.

Daljeet Kohli, head of research at India Nivesh, says, “One needs to be cautious now. IT stocks have already rallied beyond targets and booking profits at this juncture looks better rather than waiting for more.” From here, the risk-reward ratio didn’t appear favourable, he added.

The equity head of a mid-sized fund house says, “At present, its only pharma and IT that are helping investors; other pockets neither have certainty nor visibility of earnings. We are diluting a bit of our holdings in Infosys and Tech Mahindra, but it is tactical selling. Upon the sector’s guidance, we will restructure our investment bids. At a time when India’s economy is challenged, the IT pack is relatively stable.”

Instead of Infosys, shares of which jumped about 30 per cent to Rs 3,000, fund managers are more comfortable with TCS, Wipro, HCL Tech and KPIT Tech.

Analysts agree with the cautious call of fund managers. Ankita Somani, research analyst at Angel Broking, says, “There has been a significant run-up in IT counters. I believe at current levels, these have reached fair valuation. But I would not prefer further buying; rather, a ‘hold’ strategy is recommended.”

Software majors have proved helpful to the otherwise struggling portfolios of fund managers. With banks taking a hit amid the looming uncertainty, they were quick to shift allocations from financial services to IT. According to latest allocation statistics, the wide gap between exposure to banks and IT has narrowed to less than two percentage points.