Stocks of software service companies in India has been on tear away rally since the beginning of this year and top 5 biggies (TCS, Infosys, Wipro, HCL Tech, Tech Mahindra) are up anywhere between 50% to 75% YTD.
The run up in IT stocks in India happened on the back of two primary reasons - better demand outlook in US & Europe and massive depreciation of Indian currency vis-a-vis USD-GBP-EUR. CNX IT index is up more than 50% since January 2013.
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| CNX IT Index 3 year Chart |
The second quarter results of top 4 IT companies have largely been optimistic but the share prices of majority of them corrected after the result announcement as they already appreciated sharply in anticipation of good results. Now since the results are out and the stock prices have cooled off from their highs lets see which IT stock should be avoided and which stock deserves a buy on dips purely based on valuation parameter.
In terms of growth TCS, inspite of it big size, delivered highest dollar and constant currency growth in revenues but trading at very step valuation compared to other IT companies. Wipro being the lowest in terms of revenue growth is also an avoid as the run-up in stock has been very steep and the valuation is not very compelling.
Also Read: IT Companies Market Share in India
Infosys and HCL tech on the other hand had shown reasonable revenue growth and trading at attractive valuation even after the appreciation in stock prices since Jan this year. Hence value investors should focus on these two stock and employ a buy on dip strategy to slowly accumulate these stocks over next couple of months. Both HCL tech and Infosys have the potential to get re-rated on valuation front.
Infosys and HCL tech on the other hand had shown reasonable revenue growth and trading at attractive valuation even after the appreciation in stock prices since Jan this year. Hence value investors should focus on these two stock and employ a buy on dip strategy to slowly accumulate these stocks over next couple of months. Both HCL tech and Infosys have the potential to get re-rated on valuation front.
Hi Amit,
ReplyDeleteThis article provides interesting points on the large IT players and your observations are very good.
I just wanted to know your observations or comments on two mid-sized IT companies, which are
1) Mphasis &
2) Mindtree
From what I know Mphasis' performance has not been consistent but valuations seems attractive. But Mindtree's performance is consistent.
I've also been hearing about Tech Mahindra and how its joining the top IT names after its merger with Mah. Satyam. Any comments on that will also be great.
Thanks and Wish you and the Investorzclub Team a Happy and Prosperous Diwali.
Hello Sridhar, wish you too a very happy and prosperous diwali. Regarding IT in general and overall midcap IT basket, I am not that too bullish as most of the good news are priced in. With immigration bill overhang it would be too risky to be long on IT midcaps in a major way. Largecaps specially HCL tech and Infosys will provide safety as they are trading at 15-16 time PE multiples which is ok. If at all one has to look at midcap IT then Mindtree and Zensar Tech in my view looks good from 1-2 years perspective. One can accumulate them on correction. However it must be remembered that no more than 10% of your equity portfolio should go to 1 single stock.
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