Fund managers are reducing weight in IT sector; time to be cautious or value buys?
Aptech rose 200 percent, followed by Mastek which rallied 93 percent, Datamatics up 89 percent, and TVS Electronics rose 87 percent in last one year.
Mutual Fund managers are quietly reducing their weightage in IT sector which is marred by factors such as regulatory concerns, a slowdown in demand environment, as well as currency appreciation against the US Dollar.
Mutual Funds commended a cumulative weight of 9.7 percent back in May 2016 which has now come down to 6.8 percent in May 2017. Although, on a month-on-month basis (MoM) MFs increased the weight slightly in May from April 2017.
There are a lot of headwinds which the sector is facing and the biggest causality of that is the big-ticket stocks or the bellwethers of the industry. TCS slipped 6 percent, Infosys cracked 20 percent, MindTree fell 18 percent, while Tech Mahindra dropped 27 percent in the last one year.
However, midcap IT stocks have done much better than tier-1 stocks in the last one year. Take, for example, Aptech rose 200 percent, followed by Mastek which rallied 93 percent, Datamatics up 89 percent, and TVS Electronics rose 87 percent in the same period.
But, IT could emerge as a dark horse, suggest experts. After sharp underperformance by marquee names, it makes sense for investors to put in some money in IT stocks but the recovery could well take time, maybe more than 12 months.
“In terms of a dark horse, IT has been beaten down very aggressively on concerns on the structural chain. Now valuations have become very cheap. I do not see that IT will have a structural issue in which companies will collapse or they will not be able to remodel themselves,” Prashasta Seth, chief investment officer at IIFL Asset Management told Moneycontrol.
“If you ask me from a valuation perspective and where things are trading, IT is looking interesting,” he said.
In Q4FY17, the top five Indian IT companies delivered a muted performance, but the revenue growth remained broadly in line with the estimates excluding Infosys.
HCL Tech led the pack in terms of top line growth, with a constant currency (CC) revenue growth of 3.8 percent QoQ, followed by Wipro (1.7% QoQ CC, flattish in organic), TCS (1.0% QoQ CC), Tech Mahindra (0.9% QoQ CC) and Infosys (0% QoQ CC).
The muted performance was largely on account of geopolitical uncertainties, transition in client specific pattern and legacy to digital, pricing pressure and delay in IT spending due to cyclical challenges weighed on performance which is unlikely to fade away in quick time.
But, the technology sector does look attractive from a long-term basis, suggest experts. The companies would be able to overcome short-term challenges in the long run which would be the sector back in flavour.
“IT looks extremely attractive. It is perhaps amongst the best contra-trades which are there in the marketplace. The reality is that these are cash rich companies, they are doing buybacks, they are paying out capital, they realise the challenges that they have in front of them,” Nilesh Shah, MD & CEO of Envision Capital told CNBC-TV18 in an interview.
“They are trying to tweak the business models and a lot of concerns which have got reported have been, in a way, denied by these set of companies. So overall, we are still talking about growth and valuations have also become attractive,” he said.Shah further added that at this kind of levels, valuations of some of these companies are now down to mid-teens. “I think it could be a good contra-bet. The sector is probably a strong candidate to deliver strong returns over again a medium to long-term horizon,” he said.