Tech stocks take a breather but further upside expected

The rise in IT stocks began in May when rupee depreciation took effect

After a six-month rally, information technology (IT) stocks seem to have finally taken a breather in the last two months. However, analysts say the break may be short-lived and the sector may see a further upside of 15-20 per cent.

“IT stocks have seen a decent run-up in the last few months. Generally, the third quarter of a financial year is a little weak for these companies because it is the year-ending quarter in western economies. It was a seasonal part of the business and, therefore, stock price rise could have slowed,” said Sachin Shah, fund manager with Emkay Investment Managers.

The rise in technology stocks began in May, aided by the rupee depreciating against the dollar, owing to the improving outlook for the US economy. The subsequent rise in these stocks was due to better-than-expected results in the following quarters, as the US and European economies improved. Since May, the BSE IT index has risen by 44.5 per cent. Large-cap IT stocks such as Infosys and TCS rose about 10 per cent during the period.

Analysts said it was possible these stocks were consolidating, awaiting further improvement on both domestic and global fronts.

“Volume growth for these companies could be around 10 per cent from here, but the pricing power would remain stable at these levels. This means from here, year-on-year profits for these companies may not be as high as earlier,” said Prateek Agrawal, chief investment officer, ASK Investment Managers. Growth in the sector would also depend on the improvement in the domestic economy, he added.

Some sections of the market believe while the outlook continues to be positive on these stocks, investors may also look at other sectors, with higher upsides such as stocks in the capital goods, auto and metals sectors.

However, views are divided in their views on valuation opportunities in this sector. Some believe large-cap stocks have run-up too much and that investors could look at mid-cap stocks for further upsides.

The MindTree and Tech Mahindra stocks have risen 45.9 per cent and 35.53 per cent, respectively, since August. Others believe large-caps such as Infosys and Wipro have some upside left and are fairly priced.

Analysts said these stocks would be a good buy, even in the case of a minor correction in their prices in the short term. “At this point, we do not see any reason to go short on these stocks. There is huge institutional interest in these stocks. So, at any dip in prices, we could see new buyers coming into these stocks,” said Ashish Chaturmohta, head of technical and derivatives analysis, Fortune Equity Brokers.

For now, the outlook on these stocks continues to be robust, as estimates provided by these companies point towards better earnings in the coming quarters.

“The demand environment for IT companies continues to remain buoyant. This, along with currency benefits, is a good reason to be invested in these stocks at this point,” said Shah.