Tech stocks take a breather

Rupee resilience causes change, though the scrips could see a short-term slump; caution advised for investors

Software exporters, top performers on Dalal Street in 2013, have seen their popularity among investors wane of late. Resilience in the rupee against the dollar even after partial rollback of the US Fed’s stimulus package and rich valuations have prompted investors to trim their exposure to these stocks.

In the past month, the technology sector index, CNX IT, has declined 3.5 per cent. Though the decline in almost in line with the benchmark index, the Nifty’s drop of 3.3 per cent, market participants have taken note. This is because the IT index returned 57 per cent in 2013, against the 6.8 per cent gain in the Nifty.

The rally in these stocks such as Tata Consultancy Services, Infosys, Wipro and HCL Technologies picked up pace mid-way through 2013 because of the decline in the rupee to the dollar.

Though the currency rebounded, investors lapped these stocks in the past few months on hopes that the Fed’s decision to cut its bond buying programme —Quantitative Easing — would lead to the rupee again weakening against the dollar.

“The rupee has remained stable even after the second round of tapering announcement. This has left these stocks with very little upside opportunities, as most of the rupee depreciation has been factored into the prices,” said Nirmal Rungta, director and head (private client group), CIMB Securities.

Software exporters, which derive a large chunk of their earnings in dollars, benefit from a weaker rupee. The rupee fell about 12 per cent in 2013 and has declined 0.5 per cent so far in 2014.

Analysts believe the stocks could see a further downside of five to 10 per cent in the short term.

Technical analysts said investors should remain cautious, as the index could touch 9,200 in the short term. “Investors could look at initiating fresh long positions on the IT sector after the index touches 9,200-odd levels and go short at 10,200 levels,” said Sahaj Agrawal, deputy vice-president (derivatives research), Kotak Securities.

Selling by exchange-traded funds (ETFs) which invest in the benchmark indices, Sensex and Nifty, also contributed to the weakness. Shares of Infosys and TCS enjoy sizable weightage on these indices.

“There is no discretion in the market when it comes to this type of ETF-selling. Since the weightage of the IT sector is higher, foreign institutional investors would have sold off their IT holdings, leading to a fall in the market and the IT stocks,” said Sandeep Singal, co-head (institutional equity), Emkay Global Financial Services.

The sell-off, however, has largely been in the large-cap space. But some mid-cap names have also seen some selling, owing to their high valuations. Some in the market believe at current valuations, the gap between mid-cap and small-cap segments have narrowed.

For instance, index majors such as Infosys and TCS have risen 60 per cent and 50 per cent since May 2013. But mid-cap names like Mindtree and HCL have nearly doubled their stock price during the period. Tech Mahindra has risen about 95 per cent.