IT stocks suffer a reversal of fortunes

Defensives dumped in favour of high-beta sectors such as banking; a technical correction, say experts

Information technology (IT) stocks seem to have been caught at the wrong end of the strong message sent out by Raghuram Rajan, the new governor of the Reserve Bank of India (RBI).

Several measures announced by Rajan on Wednesday sent the rupee soaring, which left IT stocks in a tizzy. The BSE IT index, the best-performing sectoral index this year, fell 2.9 per cent as the rupee gained 1.5 per cent against the dollar on Thursday. The fall was led by Infosys and TCS, which fell 3.3 per cent each.

Currency appreciation eats into the profits of IT companies, which derive most of their revenues from the US and European markets.

Analysts, however, aren’t reading much into the fall. They continue to remain upbeat about these stocks and expect these to continue to outperform.

Experts said on Thursday, in light of RBI’s steps to arrest the rupee’s fall, investors had dumped defensives in favour of high-beta sectors such as banking. “This is a technical correction, as the IT sector had outperformed the broader market by about 30 per cent. At the end of the day, market valuations are comfortable. The consistent rupee depreciation has helped these stocks,” said Shankaran Naren, chief investment officer (equities), ICICI Prudential Mutual Fund.

Thursday’s correction notwithstanding, the BSE IT index has risen 38 per cent so far this year.

Investor interest in IT stocks started gaining momentum around June, when the rupee started depreciating. The fall was triggered by a turnaround in the US economy, which saw capital outflows of bonds and equities. A recovery in the US economy implied increasing offshore business opportunities for Indian IT companies, said an analyst.

Since the beginning of this year, index heavyweights Infosys and TCS have risen 30 per cent and 58 per cent, respectively, while Wipro has risen 18 per cent. During the same period, HCL Tech gained 63.4 per cent, Tech Mahindra 47.9 per cent and Hexaware 46.6 per cent during this period.

Technical analysts said the correction in these stocks was on expected lines, as the stocks had seen substantial upside. “Stocks such as Infosys, Tech Mahindra and Hexaware had started showing signs of exhaustion. We are expecting some more downside in these stocks before they bounce back,” said Mehul Kothari, senior technical analyst (equity), Tathastu Advisory.

However, fund managers remain optimistic about growth in the sector. “A big positive for IT stocks in the medium term has been the improving outlook of the US and European economies. Going forward, there is no change in this view and we continue to remain bullish on this sector,” said S Krishna Kumar, head of equity at Sundaram Mutual.