IT stocks : Equity fund managers press 'pause' button

Await quarterly performance and companies' commentaries

With merely ten days left before the IT giant Infosys comes up with its July-September quarterly show, India's equity fund managers have adopted a wait and watch policy. Rather, they are not minding slightly pruning exposures in some of the IT counters which have risen signficantly.

The cautious stand comes at a time when allocation of equity assets to IT shares reached 14% - the highest in several years. With first government shutdown in the US since 1996, investment managers are currently taking no risk in further hiking allocation to software exporters - shares of which have rallied as high as 75%, thus far this calendar year.

"This is not an hedge but a cautious approach. No other sector is better enough to provide a hedge against IT currently. Though we are not expecting September quarter to be a bad one, but we chose to halt our buy calls on IT shares for the time being," says chief investment officer (CIO) of a foreign fund house. According to him, markets are a bit sceptical about Infosys and company's commentary is awaited.

Infosys, which sets the tone of earning performance, is scheduled to announce its quarterly numbers on 11 October. The company threw surprises - negative as well as positive, in the second half of FY13 which fund managers found a bit of misguidance from the management.

Since the beginning of the current financial year, appetite for IT stocks kept on rising as western markets came up with positive data points. This made fund managers almost double their allocation to IT over the last several months. And the strategy clicked well 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 on, risk-reward ratio does not appear favourable, he adds.

Equity head of a mid-sized fund house, says, "At present it's only pharma and IT which is helping investors. No other pocket has neither the certainty nor visibility of earnings. We are diluting a bit our holdings in Infosys and Tech Mahindra, but it's a tactical selling. Upon sector's guidance we will re-structure our investment bids. At a time when India's economy is challenged, IT pack is relatively stable."

Instead of Infosys, shares of which had a steep jump of over 30% to Rs 3,000 levels, fund managers are more comfortable with TCS, Wipro, HCL Tech and KPIT Tech.

Sector analysts agree with fund managers' cautious call. According to Ankita Somani, research analyst at Angel Broking, "There has been a significant run up in IT counters. I believe that at current levels they have reached fair valuation. But, I would not prefer further buying, rather hold strategy is recommended."

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