IT stocks slide. Time to cherry pick?

On a monthly basis, the S&P BSE-IT index has gained nearly 3 per cent, compared to 10 per cent drop in Indian equities in the corresponding period.

Indian software makers have underperformed the benchmark indices in today’s trades on account of profit-booking.

The S&P BSE IT index dropped 1.6% in trade today, underperforming the benchmark indices - the S&P BSE Sensex and the CNX Nifty that gained nearly 0.7% each.

However, on a monthly basis, the S&P BSE-IT index has gained nearly 3 per cent, compared to 10 per cent drop in Indian equities in the corresponding period.

A sharp depreciation in the rupee and signs of revival in markets such as US and Europe has been the prime reason for strong outperformance of IT stocks.

So should you make use of the current slide in IT stocks and do some bargain hunting?

Most analysts expect IT shares to remain firm going ahead and expect improvement in growth outlook of country’s software exporters.

"We remain positive on the IT sector. The growth recovery in US and Europe along with steep depreciation in rupee has improved outlook of IT companies. Today's correction is merely on account of profit-booking and can used to BUY IT stocks from a 6-8 month horizon," said Sanjeev Hota, assistant VP (IT), Sharekhan.

The slide in the Indian currency, of 16.5 per cent against the dollar so far this year, has made it the worst-performing among the Asian ones.

For IT exporters, 1 per cent depreciation in the rupee against the dollar tends to add over 30 basis points to operating margin on an average.

However, the exact benefit, depends upon the cash flow hedging practices of companies, explains Nitin Padmanabhan of Espirito Santo.

“Outlook has improved significantly as companies are more confident of getting large deals. The recovery signs in US have coincided with rupee fall against dollar which will help improve revenue growth in USD terms,” he says.


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Sharekhan recommends Tata Consultancy Services (Target: Rs 1,950), HCL technologies (Rs 1,100), Persistent Systems (Rs 600) and CMC (Rs 1,500).

Shashi Bhusan of Prabhudas Lilladher Private Ltd finds a lot of value-buying in IT stocks. We continue to expect improvement in revenue momentum for Infosys as the company is more open to traditional IT deals. Also, as restructuring for Wipro is coming to an end, we expect the investment in the business to start bearing fruits in FY14. We expect continued room for positive surprise from Infosys and Wipro due to continued low running expectation and valuation gap," he quoted in a recent report.

Likewsie Espirito Santo is also bullish on the IT space. Among the blue-chip IT stocks, they are bullish on Wipro (Target: Rs 460, needs upgrading) and Infosys (Target: Rs 2,770). In mid-caps, they recommend Persistent Systems (Rs 600) and KPIT Cummins (Target: Rs 160).