Analysts remain positive on India’s IT stocks after 2013 rally

January 24, 2014

India’s information technology services businesses will continue to benefit from improving client demand from developed countries in 2014, pushing stocks higher after a stellar performance last year, analysts told India Insight.

India’s No. 1 IT services exporter Tata Consultancy Services (TCS) and its rival Infosys beat analysts’ expectations in their financial results that were released earlier this month. They also raised their sales growth forecasts on signs of improving economies in the United States and Europe.

“In Europe we are gaining market share; in U.S. things are looking up – that will drive discretionary and new technology spends,” said Kuldeep Koul, IT-sector analyst at ICICI Securities. “What’s also helping the industry … is the fact that the rupee continues to remain at very benign levels.”

Global IT spending worldwide is expected to rise more than 5 percent this year, according to research firm International Data Corporation, while Gartner expects spending to grow 3.1 percent to $3.8 trillion.

The BSE IT index rose nearly 60 percent in 2013 on signs of a global economic recovery and a weak rupee which helped boost earnings. Stocks such as TCS rose 73 percent while Infosys rose 50 percent.

TCS, which counts Aviva and BT Group among its clients, expects 2014 to be “a better year” than 2013, its chief executive said last week after reporting financial results.  The U.S. and Europe are the main markets for India’s $108 billion IT services industry.

The sectoral index has extended its gains this year, rising 6 percent in January and outperforming the benchmark 30-share BSE Sensex which is up 0.5 percent. While a similar rally like last year is not expected, some analysts said IT stocks could rise 10-15 percent from current levels in the near term.

“If you want to take a six month’s view, one can look for 15 percent rise from the current levels,” said SP Tulsian, an independent investment adviser. “I don’t think that you can expect the similar kind of returns, because at that time there was lot of negative perception on the IT stocks and they were ruling at much lower valuations.”

The recovery in the Indian IT business also prompted fund managers to raise their bets on these stocks by December. Nearly 160 of 322 equity diversified funds had investments in Wipro by December as compared to 91 funds a year ago, Morningstar India data showed. TCS was part of 190 portfolios, up from 155.

“We are overweight on the sector,” said Dipak Acharya, fund manager (equity) at Baroda Pioneer Asset Management Company, whose funds have investments in IT stocks such as TCS and Infosys.

Some analysts are also betting on Tech Mahindra, whose shares almost doubled in 2013. Of the 43 analysts covering the stock, 33 have a buy or an equivalent rating, Thomson Reuters data showed.

“I think Tech Mahindra still has more upside … because still it is undervalued,” Tulsian said.

Tech Mahindra trades at about 15 times its estimated earnings for the year to March 2014, compared with about 20 times for Infosys and more than 23 times for TCS, data showed.

Other than improved spending from developed economies, continued traction in the SMAC (social, mobility, analytics and cloud) technologies will also help Indian IT firms in 2014, Ambit Capital said in a research note last week.

Among concerns, Emkay Global said in a note U.S. immigration reforms will be a key risk for the sector, while research firm IDC said organizations are likely to take a cautious approach on IT spending due to general elections due by May.

(Editing by Aditya Kalra and Robert MacMillan; Follow Sankalp on Twitter @sankalp_sp, Aditya @adityayk and Robert @bobbymacReports. This article is website-exclusive and cannot be reproduced in any form without permission)

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