IT shares drop on profit booking

IT shares have been best performers across sectors so far in 2013 with IT index gaining 46% since January

Shares of information technology (IT) stocks fell on Thursday on account of profit booking after the July-September results. HCL Technologies fell 4.65%, Wipro declined 4.25%, and Tata Consultancy Services dropped 2.5% on Thursday, dragging down the IT index by 1.7%.

“Indian IT stocks made a new high in the run-up to the results, but underperformed the market post-results, as 2Q just about met the heightened Street expectations,” said HSBC Global Research in a note to clients.

IT shares have been the best performers across sectors so far in 2013 with the IT index gaining 46% since January. The Sensex has gained 6.9% in the period.

“US banks reported a sequentially weaker Jul-Sep quarter and most upstream tech companies broadly reported a muted quarter or outlook. This should leave any tech investor worried,” said HSBC.

Wipro shares have fallen almost 5% after the company September quarter results lagged its peers. The stock had gained 34% so far this year.

“We expect Wipro to continue to register lower growth compared with its top-tier peers and believe it will continue to witness a P/E multiple discount,” said Nirmal Bang Securities, which has a sell rating on Wipro.

TCS shares have fallen 4.7% so far this week after investors booked profits. The stock has gained almost 60% so far in 2013.

“While the company’s performance continues to set new benchmarks, the P/E valuation appears to have priced in a lot of the same,” said India Infoline.

HCL Technologies have fallen 2.7% so far this week after gaining 70% since January.

HCL Tech has outperformed the Sensex on expectations of maintaining its revenue growth leadership in the sector, improvement in revenue traction outside of infrastructure management services and sustainable margin improvement,” said Deutsche Bank which has downgraded the stock to sell. “We believe it will struggle to meet these expectations and hence our downgrade”.

Infosys shares bucked the weak trend in IT shares so far this week. The stock, which has gained 42% since January, has gained 1.2% so far this week.

Analysts said they remain optimistic about the sector’s prospects in the long term but near term valuations might be stretched.

“There was a bit of convergence in the growth rates across the top four Indian IT services companies (TCS, Infosys, HCL Tech, Wipro), but we believe it is too early to conclude that laggards have entirely healed,” said HSBC.