IT’s time to buy? Infosys, TCS get a ratings boost
By ECONOMICTIMES.COM | 14 Aug, 2013, 12.11PM ISTNEW DELHI: The rupee is just refusing to appreciate despite several steps unveiled by the government, and this comes as a big boost for the IT sector. Considering this and a host of other factors, brokerage Nomura has re-evaluated the sector, upgrading Infosys to 'buy' and TCS to 'neutral'.
HCL TechnologiesBSE -2.07 % remains the brokerage firm's top pick. Besides the rupee, what is making the set-up turn favourable for the IT sector is its defensiveness in a worsening macro-economic environment in India, the brokerage said. IT services has been the best performing sector in the Indian market from year-till-date perspective, and has outdone other defensive sectors like FMCG and pharma by more than 20 per cent year till date.
On the US immigration bill's impact on the IT sector, the brokerage says that given the lack of clarity and delays, it is seen only as an option-risk for the sector. The brokerage said it would re-visit the view when more clarity emerges. On Tuesday, the S&P BSE IT index rallied to a fresh 52-week high of 7,654.31, led by gains in Infosys, Tech Mahindra, Wipro and Hexaware Technologies. While Infosys hit a 28-month high; Tech Mahindra, Wipro and MindTree hit their respective 52-week highs in intraday trade on Tuesday. Talking exclusively about Infosys, its shares have been in a clear uptrend since July, up a little over 23 per cent in the year-ago period, as of data collected on August 13.
Nomura is of the view that the discretionary demand improvement acts as a catalyst. Discretionary segments have outdone at TCS, Infosys and Cognizant in the current quarter and commentaries at TCS and Cognizant on discretionary outlook are heartening, the brokerage says. Across companies, commentary suggests FY14 is likely to be a normal year with budgeted spends happening. With discretionary demand showing signs of pick-up there is a possibility that the stocks could trade closer to the higher end of their historical valuation ranges. In terms of valuations, the tier-1 IT universe trades at 18x one-year forward earnings, a premium of 10 per cent to its historical average of 16x.
Comparing this other defensive sectors, i.e. FMCG and pharma, the discounts on their valuations are of 43% and 12%, respectively.
Sector valuations excluding TCS are in line with historical average, and the brokerage firm believes that they can sustain given an improving demand outlook and receding risks.
"We rebase our multiples for TCS and Infosys to reflect the same and upgrade Infosys to 'buy' on discretionary uptick which could provide greater operational freedom and TCS to 'neutral'. Our top pick remains HCL Technologies, followed by Infosys.
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