IT index clocks 58% rise in 2013

Second biggest yearly gain ever, with HCL, Mindtree, Persistent Systems and Tech Mahindra seeing their scrips nearly double

The S&P BSE Information Technology index is set to report its second ever sharpest yearly gain in calendar year 2013, on hopes of a rise in demand in 2014, on the back of a better macroeconomic environment in the United States (US) and the European Union (EU).

So far in 2013, the S&P BSE IT index has rallied 58 per cent, as compared to a 8.3 per cent rise in the benchmark S&P BSE Sensex, making it the biggest yearly gain since 2009 in percentage terms for the index. In 2009, the IT index had reported a record gain of 133 per cent, against a 81 per cent surge in benchmark index. The index gained 32 per cent in 2010 and fell 16 per cent and one per cent in 2011 and 2012, respectively.

Fuelling gains
IT stocks have largely built on hopes of an improved growth outlook from the US and EU and due to the gain from rupee depreciation. As the US macro environment improves, discretionary spending on IT services could pick up. Also, the rupee has depreciated 13 per cent against the dollar, to 61.96 from 55 at the beginning of the year. IT companies earn most of their revenue in dollars; so, each dollar earned abroad would get them more rupees.

HCL Technologies and Tech Mahindra from the large-cap and Mindtree and Persistent Systems from the mid-cap space have seen their market value almost double in 2013. Tata Consultancy Services (TCS), Infosys, Hexaware Technologies, Infotech Enterprises, eClerx Services and KPIT Technologies have surged by 50–80 per cent. The combined market capitalisation of IT stocks has increased by Rs 342,891 crore to Rs 988,174 crore, as against a Rs 406,471 crore market capitalisation erosion recorded by the remaining sectors during the year.

Operational performance
Analysts believe Indian IT is at the threshold of a cyclical recovery in demand, likely to boost revenue momentum in its traditional services offerings, the applications segment.

“We expect the cyclical recovery to be a rising tide, boosting revenue growth for most vendors in the next three to four quarters. Our expectation for a structural improvement in demand underpins our overweight IT services call,” said Gautam Chhaochharia, head of India research, UBS Securities India.

Bhuvnesh Singh, managing director and head of research, Barclays India, suggests the management commentary during the recent results unanimously highlighted that the deal pipeline was better than the previous year. He believes despite the run-up in stock prices seen in 2013, sector valuations remain inexpensive compared with the history.

“In the large-cap space, we see improvement in the win rate of Wipro to drive the business momentum, along with available margin levers to drive accelerated growth. We see the stock in an early stage of the re-rating cycle and reiterate a ‘buy’ rating, with a target price of Rs 600. Among mid-caps, we expect Mindtree’s revenue momentum to get stronger (on a seasonal adjusted basis), with margin expansion in constant currency. We retain a ‘buy’ recommendation with a revised target price of Rs 1,530,” said R Sreesankar, an analyst with Prabhudas Lilladher.

Among the other large-cap stocks, Angel Broking maintains a ‘buy’ rating on TCS, with a price target of Rs 2,500. Ankita Somani, one of its analysts, says: “We expect TCS to outperform the industry on revenue growth due to its superior market reach and excellent execution capabilities. We expect TCS to grow its dollar revenues at a compounded annual rate (CAGR) of 15.5 per cent over FY2013-15, and the earnings per share to grow at a CAGR of 27 per cent during this period.”