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More Pain Left in Technology

Atul Penkar, manager of Birla India Opportunities fund, is bullish on the technology sector. Here's why

Birla India Opportunities Fund is a thematic scheme with the objective of investing in export oriented companies that leverage India's intellectual capital for providing services and manufactured goods. The fund's current exposure to the infotech sector was down to 14.65 per cent (February 2008), from over 40 per cent a year ago. But fund Manager Atul Penkar is still bullish on the long-term prospects of this sector. Here he tells us why.

On the prospects of Indian IT companies…..
Earlier Indian IT companies were engaged in smaller and short duration projects in the Y2K and dotcom related activities. The business model of most IT companies has progressively evolved since then with a broad based service approach. These companies now manage large programmes for clients and offer a multitude of services - reflected by the large deal wins from existing as well as new clients.

We believe that the secular offshoring trend remains intact, although there could be some challenging times in the short term on account of the US slowdown. However, we expect business to pick up in the medium to long term as cost pressures on the U.S. companies lead to more offshoring.

Indian IT companies, with their proven business model and strong execution capabilities, have acquired the ability to offer complete IT solutions to clients. Hence, they have been successful in bagging large transformation deals in competition to their global peers. Besides, most Tier-I IT companies have managed their costs well despite a sharp appreciation in the rupee and highest salary inflation in FY08. This would infuse the confidence in clients that Tier-I companies are better placed to deliver promised cost savings from offshoring.

On whether IT stocks are a good buy now….
We follow a bottom-up investment approach with emphasis on companies with strong underlying business fundamentals. We believe that under/over ownership is a technical parameter. While we believe that stocks typically require triggers, they also do get re-rated as and when companies deliver on expectations.

Valuations of Indian IT stocks have corrected significantly in the last 12 months, with most of the Tier-I software companies trading at a PE of 14-15x FY09E. Sharp rupee appreciation, minimum alternate tax on 10A and 10B, concerns on the U.S. slowdown and nearing of sunset clause on taxation are some of the reasons for the de-rating in the sector.

Although valuations are attractive at the current levels, there is still a lack of clarity on the volume growth and pricing outlook in the short term. We believe that there is still some more pain before we can see some meaningful gain in the sector.