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IT Sees Sunrise Again

The sector that was plodding along at snail’s pace has received a gift of wings

This article first appeared in the October issue of Wealth Insight magazine and showcases the tremendous strides taken by the infotech sector's stocks at a time when not many thought it would do well.

Markets and investor sentiments have always been known to ride side by side. Both test the zenith and the nadir in brotherly togetherness. And perhaps for the same reason, during the period January 8, 2009 to March 9, 2009, with the world reeling under recessionary pressures, markets dipped profusely and along with it investor outlook. And feeling the ill effect the worst was the infotech sector.

Too much Western dependency cost the sector during the recession. Then it was hit by the depreciating rupee, causing investors to sell-out, thereby hitting IT stocks — just the mere hint of a fall in demand drives down these stocks. BSE IT Index fell 47 per cent during this period and the IT sector had been written off for the time being. The other indices were not doing any better with the BSE Sensex down 55 per cent.

The revival, when it came, caught everyone by surprise, March 9 onwards. Recession fears decreased and demand for IT products stabilised in the West, which was enough to revive the moribund investor sentiment, sending IT stocks skyrocketing, back to their pre-meltdown, valuations.

With new orders flowing regularly and old ones being extended, IT companies started showing signs of revival and their profits as well as their financial results took a positive bent, especially as they reduced their overheads through various cost-cutting efforts that raised margins. From extreme lows, the IT Index soared 115 per cent.

The entities responsible for the revival were mid- and small-cap companies and not the larger ones. But that was along expected lines as these stocks took the worst hits during the bear phase — NIIT’s returns jumping 382.22 per cent.

But, it is the position of the biggies that drives sentiment and they have not been slouching. The profits of the top five IT companies have shown a consistent rise from 2007-08 quarter till 2008-09. While Infosys stock returns stood at a negative 28 per cent in the bear rally, it surged to 89.68 per cent in the bull phase, till September 15, 2009. TCS returns rose 146.93 per cent in the bull phase from a negative 53.32 per cent, while HCL Tech jumped 244.68 per cent.

Looking ahead, the chances of second-level firms like Tech Mahindra Ltd , MphasiS Ltd and Patni Computer Systems outperfroming are remote, but the top-level companies' stocks are still adding value as they have protected their revenue growth to quite an extent, or at least, managed to restrict the falls. Add to that the fact that the top three IT biggies, Infosys, TCS and Wipro, saw revenue growth in both the previous fiscals indicates they have lots to offer globally.

Also, IT’s clout over the Indian economy has been rising — over a period between fiscals 1997-98 and 2008-09, sector’s revenue has risen from 1.2 per cent of the gross domestic product to 5.8 per cent. The fact that it is growing at a compounded annual growth rate (CAGR) of 18.6 per cent, according to Springboard Research, will keep pushing it further.

With the IT sector stocks returning as much as 148 per cent since March 2009, expectantly, the PE multiples have almost doubled to 20, yet expectations are that further rises are in store.

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