BSE IT index hits 34month high
Large-cap information technology (IT) stocks hit multiple-year high on Tuesday, driving the BSE IT index 3.32% higher on a day benchmark indices closed flat.
The BSE IT index closed at a 34-month high while the BSE Sensex and the National Stock Exchange’s Nifty slipped 0.2-0.3%.
Shares of Tata Consultancy Services Ltd ended at record high while Infosys Ltd, Tech Mahindra Ltd, HCL Technologies Ltd and Wipro Ltd rose to multi-year highs.
Euphoria in large cap IT stocks was mostly led by Morgan Stanley Research’s prediction that Indian IT services stocks could be set for a turnaround in 2018.
According to the research firm, valuations are at or below long-term averages as large-cap IT stocks have underperformed the Sensex for the last three years. An improving global economy could spur tech spending, which could lead to a rerating of IT stocks. Morgan Stanley sees a 17-69% upside for IT services stocks in a bull-case scenario.
“We believe a turnaround in IT spending is imminent, which could quickly turn sentiment on these stocks. While structurally the sector faces risks from automation and a slower pace of market share gains from global vendors, we believe a cyclical rally could be in the offing. Valuations for most names are at historical averages and sectoral risks such as H-1B visas are dissipating, thus suggesting a reasonable risk-reward framework at current levels,” Parag Gupta and Gaurav Rateria, analysts at Morgan Stanley, wrote in a report on 15 January.
They added that some improvements in the tech spending environment are visible, which could improve growth rates of Indian IT vendors.
Morgan Stanley believes that improvement in revenue growth should be a stock driver as long as margins remain within a tight band. “Large deal wins in traditional outsourcing, infrastructure management and BPO (business process outsourcing) segments can lend visibility on revenue growth,” it said.
Catalysts include a rebound in the banking, financial services and insurance (BFSI) and retail segments.
Morgan Stanley upgraded Infosys, Tech Mahindra and HCL Technologies to ‘overweight’ and TCS to ‘equal weight.’ On the mid-cap side, it upgraded MphasiS Ltd to ‘overweight’ and downgraded Hexaware Technologies Ltd to ‘underweight.’
Key risks to margins could be sharper rupee appreciation, large merger and acquisitions transactions (that are margin-dilutive) and accelerated hiring in onsite locations, Morgan Stanley said. “Also, any renewed concerns with respect to H-1B visas will need to be monitored as changes could negatively affect margins,” it said.
In the last three years, the BSE IT index rose 9.27% whereas the Sensex rose 23.64% and BSE Midcap and BSE Smallcap indices rallied 67.53% and 72.11% respectively. In 2017, the BSE IT index was up 10.83% after slipping 8% in the previous year. In contrast, the Sensex climbed 27.81% last year following a marginal rise of 2.02% in 2016.
Analysts at Morgan Stanley said that most IT stocks underperformed the Sensex over the last three years as revenue growth slowed for large-cap IT services companies.
MUMBAI: