Want to sail through choppy market? Hold on to this sector

MUMBAI: As the domestic stock market is going through its worst downturn in recent times, with all sectors submerged, one has managed to hold its head above water – the IT (information technology) services sector.

BSE IT and BSE Teck indices are up 3.83 per cent and 2.89 per cent, respectively, since the end of June, while all other sectoral indices logged losses in the same period, and the 30-share Sensex shed 6.12 per cent.

“The key reason is IT is seen as a defensive sector,” said Gaurav Dua, senior vice-president and head of capital market strategy & investments at Sharekhan by BNP Paribas.

“Though the quarter one results were not great, the commentary on the growth wasn’t bad at all. Infosys actually upgraded its guidance. The rupee is also helping,” said Dua.

“It is a hedge against falling market, and a declining rupee helps boost revenues,” he added. Dua is overweight the IT pack.

A depreciating rupee translates into higher revenues in rupee terms for the export-focused software companies.

The rupee has shed 3.68 per cent since end of June, and 2.96 per cent since the end of 2018, and is the third-worst currency in Asia after South Korean won, and Chinese yuan.

A weak reading of the GDP data coupled with selling from foreign institutional investors in the equity markets have weight on the Indian unit.

Overseas investors offloaded stocks worth a net of Rs 5,920 crore in the domestic market in August even after the government rolled back enhanced tax surcharge on FPIs. In July, they had pulled out a net of Rs 2,985.88 crore from Indian stocks.

Apart from these, a relentlessly strengthening dollar and US-China trade war fears have also contributed to the rupee’s fall.

“While domestic demand –oriented are facing the heat from the slowdown in the economy, IT stands in majestic isolation, as it is almost entirely not linked to the Indian economy,” said Ajay Bodke, CEO and Chief Portfolio Manager (PMS) at Prabhudas Lilladher.

“During times of heightened risk aversion towards domestic –oriented sectors, Its emerges as a safe haven for investors. A falling rupee acts a tailwind for Indian IT companies,” said Bodke.

The IT sector revenue growth in June quarter was 8.5 per cent YoY , compared with 8.6 per cent a year ago. The June quarter growth was contributed by Tier-1 IT at 8.5 per cent YoY (fastest in 5 quarters) and Tier-2 IT at 8.9 per cent YoY (slowest in 8 quarters).

While HCL Technologies and Infosys outperformed, tier-2 IT companies disappointed, HDFC Securities pointed out.
Infosys’ operating profit for the quarter came in at 20.5 per cent, which was less than March quarter's 23.7 per cent and year-ago quarter's 21.4 per cent. But the management is hopeful that it will meet its 21-23 per cent full year guidance.

However, the country’s second-largest software services exporter increased FY20 revenue growth guidance to 8.5-10 per cent in constant currency terms from 7-5-9.5 per cent. Revenue growth in dollar terms rose 2.3 per cent to $3,131 million sequentially and 10.6 per cent on a yearly basis. In constant currency terms, revenue rose 2.8 per cent QoQ and 12.4 per cent YoY.

“We have reviewed the performance and outlook of large global enterprises (top clients of Indian IT) which indicates that near term growth will be modest (lower discretionary spend),” HDFC Securities said in a August 27 note.

“We have also run margin sensitivity on onsite cost/INR and analysed the onsite supply scenario (increasing H-1B challenges), which indicates that higher offshoring is only a partial offset,” it added.

However, the outperformance in the BSE IT pack was polarized. Only seven of 57 stocks in the index logged gains since the end of June. These companies were NIIT Technologies, Infosys, Cerebra Integrated Technologies, Genesys International Corporation, HCL Technologies, Hexaware Technologies, Tata Consultancy Services.

Of the 29 stocks in the BSE Teck index, software exporters stole the show. Infosys, Zee Entertainment Enterprises, TV Today Network, HCL Technologies, Tata Consultancy Services and Bharti Airtel were the only ones that registered gains in the same period.