Opportunities in the IT space

Infosys is always first IT company to declare results, balance-sheet also contains interesting information that goes beyond statutory needs

Every information technology (IT) services major has a different business model. In the last two years, erstwhile market leader Infosys has lost a lot of ground because of tepid growth. However, it remains a bellwether stock for several reasons. It has by far, the largest industry weight in any free-float market index. It amounts to 48 per cent in the CNXIT index. It also has a huge Foreign Institutional Investor (FII) shareholder base of 40 per cent.

Infosys is always the first IT company to declare results and the balance sheet also has interesting information that goes beyond statutory needs. So, the market response may be a good indication of institutional attitude to the entire sector.

The falling rupee has obviously inflated gains for every dollar-earning exporter and the entire sector has got a boost. Infosys jumped 11 per cent on the Q1 results, nothing special.

Is this a good enough indicator to go long on the entire sector, which presents a tempting set of short-term trades. Quite a few majors are available in the stock futures segment, which enables leveraged positions and if they deliver good results, there may be extraordinary returns.

TCS and HCL Tech have hit recent 52-week highs in anticipation of good results. Under most trend-following technical systems, both are worth long positions. The general strategy would be to set a stop loss and go long. In both cases, we have a reasonable stop loss at, or just below, the previous 52-week high. We could also use methods such as an average true range (ATR) calculation for the past 20 sessions, or the intra-day low of the past 20 sessions as a stop loss.

After TCS, and HCL Tech, other IT stocks such as Mindtree, TechM, Hexaware, Wipro, Vakrangee, etc will all declare results. Vakrangee and Mindtree have also recently hit 52-week highs. Similar methods can be followed by trend-following traders to a series of short-term positions.

There are complications. Under normal circumstances, the sector has run counter-cyclical in a downturn. This is because downturns are usually triggered when FIIs sell. And, when the FIIs sell, the rupee weakens, leading to a virtuous feedback loop for the IT sector. So, one would be comfortable going long in IT most times, despite a market downturn.

However, the RBI has just imposed a regime of tighter rupee liquidity. It has imposed daily limits on bank borrowing from the RBI. The central bank is also sterilising by selling bonds, sucking even more liquidity out of the Indian financial system.

This could break the relationship between dollar-rupee, FII selling and market downtrends. It seems to have triggered a certain amount of equity selling. But it has also artificially shored up the rupee, temporarily at least. Despite this, the sector still seems worth selective long positions.

^{The author is a technical and equity analyst}