INSUBCONTINENT EXCLUSIVE:
Authors: JordanIT, once the blue-eyed boy of India Inc, has been the least-talked-about sector for more than a decade now, as the bellwether
industry gradually lost its sheen with the decline of western economies.
But that dry spell may be getting over, as domestic fund managers
are again beginning to take interest in this space.
According to data from Value Research, a mutual fund research platform, technology funds
were biggest value creators for equity fund investors in last one year till April 30, 2018, ahead of FMCG, smallcap and international funds
in that order.
Technology-oriented mutual funds have delivered impressive performance over the past one year, with returns outpacing the
benchmark equity indices.
On an average, technology-focussed equity funds delivered 47 per cent return in last one year till April 30,
whereas Nifty IT and Nifty50 index rose 21 per cent and 3 per cent, respectively
Top IT funds generated up to 60 per cent return.
Analysts say the sky is looking clearer for Indian IT firms, as indicated by the recent
earnings numbers of industry behemoth Tata Consultancy Services (TCS).
Global brokerage firm CLSA has a buy rating on TCS with a target
price of Rs 3,700
Brokerage IIFL believes the IT sector is poised to perform well over FY18-20E on the back of an improving global macro
environment.
Renewal of IT budgets in the BFSI segment and increasing adoption of digital technologies by enterprises indicate strong
momentum for the sector.
Data showed the MF industry’s exposure to the IT sector as a proportion of total asset under management (AUM) hit
a decade’s low in November 2017.
From then onwards, there has been a steady revival in interest on the IT space among domestic fund
managers, say industry watchers.
On the top Tata Digital India Fund saw its net asset value (NAV) rise 60.75 per cent in last one year
The fund’s told holdings include Tata Consultancy Services (TCS), Infosys, Tech Mahindra, Tata Elxsi, MindTree, NIIT Technologies, Cyient,
Persistent Systems, Sonata Software and HCL Technologies, among others.
Aditya Birla Sun Life New Millennium Fund and ICICI Prudential
Technology Fund have grown their NAVs 48 per cent and 42 per cent, respectively, in last one year till April 30, whereas SBI IT and Franklin
India Technology funds have given over 30 per cent return in the same period
These funds had highest weightage of over 20 per cent to Infosys.
What helped these funds grow Well-known players, including NIIT
Technologies, MindTree, Polaris, Mastek, LT Infotech have more than doubled investor wealth in last one year
Shares of Tata Elxi, TCS and HCL Technologies have jumped up to 50 per cent in this period.
IT stocks have been amazing performers over the
past six months, says Sanjeev Prasad, Co-head, Kotak Institutional Equities in a chat with ETNow
The period of underperformance is over
Given the weak rupee, export-oriented sectors, such as IT, are likely to see earnings upgrades, he said.
Going forward, a depreciating rupee
is expected to provide further comfort on margins for the IT players
The rupee is hovering around its lowest level in last one year
The local currency is down nearly 5 per cent on a year-to-date basis till May 2.
“Other areas of opportunities for IT companies include
next-gen infrastructure outsourcing services (ISO) and engineering, research development (ERD) services, which can spur growth for
companies with exposure to these segments
Moreover, TCS’ earnings, solid digital growth and positive guidance confirm that the skies are getting clearer for the Indian IT space
Better times and higher free cash flow distribution by companies would drive re-rating for the sector,” IIFL said in a report.
TCS’
revenue growth in fourth quarter was one of the best in recent times
Revenues rose to nearly $5 billion, a 2 per cent growth sequentially in constant currency terms (which discounts the impact of
cross-currency fluctuations) and 11.7 per cent year-on-year growth in the reported currency.
Green shoots of better prospects are also
visible in the IT industry
Performance of the IT sector is heavily influenced by IT spends of BFSI clients (around 50 per cent of revenue), especially those in North
America (around 60 per cent of revenues)
Data from Information Services Group (ISG) shows calendar year 2018 has started on a positive note with around 11 per cent YoY growth in
annual contract value (ACV) at $12.2 billion in Q4FY18.
Accenture’s commentary and TCS signing its first over $50 million digital deal in
Q3 of FY18 provide evidence of growing deal sizes.
IIFL believes as enterprises move from trial stage to full-scale implementation stage,
deal flow would move to larger companies like TCS, Wipro and Infosys, among others
The IT majors have indicated that they would be looking at around 30 per cent revenue growth in the near future.
The brokerage prefers
Infosys, HCL Tech and Persistent Systems with price targets of Rs 1,379, Rs 1,309 and Rs 966, respectively
JM Financial has a ‘hold’ rating on Persistent Systems with a target price of Rs 790
Mayuresh Joshi of Angel Broking likes MindTree, Cyient and Nucleus Software among the midcap IT firms.
