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Midcap IT plunges with Hexaware; but experts say sector is steady

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Authors: JordanMUMBAI: Midcap IT stocks declined on Friday mirroring the 10% intra-day plunge at Hexaware Technologies, which faced a raft of downgrades from analysts who believe the scrip doesn’t warrant multiples superior to its peer group. Shares of Tata Elxsi, NIIT Technologies, Sonata Software and Datamatics Global declined up to 8% on Friday.

Hexaware maintained its guidance after robust quarterly earnings, prompting analysts to benchmark valuations of the company with those of peers. “We see several challenges to sustenance of valuations at the current levels,” said Ashish Chopra, analyst, Motilal Oswal Securities.

“The company may not benefit as much as peers in the near term from a depreciating INR, given that it is heavily hedged.” The fall in other stocks may be temporary, however.

Higher IT budgets for the BFSI businesses and increasing adoption of digital technologies by enterprises indicate strong momentum for the IT sector, said analysts. “The Indian IT sector is poised to perform well over FY18-20 on the back of an improving global macro environment,” said Milan Desai, analyst, IIFL.

“The depreciating trend of the rupee will cushion the margins of IT companies.” With acceleration in digital businesses, double-digit earnings growth will soon become a reality for IT companies, said analysts. “We believe large Indian IT companies are entering a V-shaped earnings recovery phase enabled by huge digital-led demand, potential margin improvement and consistent buybacks,” said Sandip Agarwal, analyst, Edelweiss Securities.

“We reiterate our structural bullish call on the sector, led by a falling proportion of low-growth business being replaced by highgrowth digital business”. The BSE Information Technology index has surged 32% in the last one year compared to the 16% gains in benchmark Sensex. “We believe companies such as Majesco, Intellect Design, Nucleus, Oracle Financials and Ramco Systems will be key beneficiaries of sector tailwinds in the software products business in general,” said Rahul Jain, analyst, Emkay Global. “In our opinion, these companies would deliver strong outperformance in growth on the back of their unique business positioning.”




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