Mar. 6 – Up until the crux of the Global Financial Crisis, India’s information technology (IT) sector was consistently one of the country’s strongest performers. Though augmentation rates shrank, the falling rupee provided a cushion. Therefore, the CNXIT index constantly outperformed the broader market and in fact, the IT sector was the only one to see capital gains.
In 2009-10, however, things began to change and other industries outperformed India’s celebrated IT sector. What is more, as the rupee strengthened, the IT industry’s growth rates became feebler. Last year too, the IT industry registered lower growth rates than usual and the advisories have been very watchful.
Due to the economic woes facing the United States and the debt crisis in the Eurozone, there is little new spending in IT. Europe has been on the edge of potential chaos for some time now and spending has been slow. There was a brief explosion of investment into IT shares when the rupee dropped to new lows in late 2011. But, the recent recovery has taken the sheen off again.
However, it remains a good counter-cyclical bet as it has a fair degree of certainty and reliability. On a broader term, IT industry advisories can be trusted because the track record of projections being met is solid.
Earnings projections broadly suggest that valuations across the IT space are not far from fair value. This is in contrast to other industries where valuations are well above fair value or projections are highly optimistic (or both, in some cases).
There could be a few drivers for IT stocks in the next two quarters. One is that the industry will meet its projections whereas other sectors probably won’t. Second, any broader market sell-off will probably push the rupee down again and IT immediately starts looking better in those circumstances.
The third is, in a situation where corporate debt is a drag on bottom-lines, the debt-free nature of the IT industry is a shining distinction. Overseas corporate debt is expected to be in focus in the next six to nine months. Quite a few companies will be faced with the need to cash in hybrid instruments like FCCB with cash – their current share prices are trading way below agreed conversion prices. That redemption pressure will hurt the rupee.
If the market relapses to a phase of extended bearishness, the assets of the IT industry will be highlighted again.
Dezan Shira & Associates is a boutique professional services firm providing foreign direct investment business advisory, tax, accounting, payroll and due diligence services for multinational clients in India. For more information, please contact firstname.lastname@example.org, visit www.dezshira.com, or download the firm’s brochure here.