Has a trading opportunity opened up in IT stocks?

Raveena Singhmoneycontrol.comInformation technology (IT), widely considered as a defensive, has under-performed other sectors as well as the benchmark. While the Sensex has gained 15 to 16 percent since its February lows, BSE IT index has remained almost flattish.The concerns surrounding the sector are many. Analysts believe that the bread-and-butter of application development faces challenges from emerging technologies such as automation and cloud. Spending from financial sector clients too has been on the wane. Most recently, Brexit has thrown a further spanner in the works.Not surprisingly, many analysts have recommended investors seek out exposures in other faster-growing sectors. In addition, poor earnings performance in the June quarter by the top IT players have just reinforced fears pertaining to the sector.But some believe that the market reaction to the recent events may now be overdone.In a note to clients, Neelkanth Mishra of Credit Suisse said that the 14 percent underperformance in the IT index since early April 2016 has opened a tactical -- market parlance for trading -- opportunity. Supporting the view, Gautam Shah of JM Financial, in an interview to CNBC-TV18, said: "Though there could be small re-bounces, there is no reason to have a large [IT] chunk in one's portfolios as it is the only index underperforming in the market." However, the over-pessimism on account of sectoral challenges has forbidden investors to see the tactical opportunity hidden in IT stocks currently. "Earnings estimates have indeed come off for the sector, particularly after the recent spate of poor results and guidance cuts. This is when overall earnings are starting to stabilise," he said. "However, price-to-earnings multiples have derated too, and the sector's P/E premium is now at five-year lows. This is clearly part of a longer derating process, but after these sharp legs down the sector's P/E does rebound for 3-6 months."Mishra picked out HCL Technologies as one stock that offered a trading bet.Despite the near term headwinds, JP Morgan Head of Research Bharat Iyer, likes the sector because of two factors: it gives very steady income stream and is not very volatile in terms of earnings."This is a sector, which is trading at a discount to overall market valuations and which has earnings growth more or less in line with the market and with very little volatility," he added. Backing the view, Nitin Jain of Kotak UK believes that there is a valuation mismatch between IT Index and broader market. "From a P/E perspective, the IT sector is trading at a discount to the MSCI India index. The sector has got valuation support."He added that the sector also serves as an interesting hedging option if worries on currency movements were to arise.But technical analyst Gautam Shah of JM Financial had words of caution."In bull markets, you want to be in sectors that are doing well. In the last 6-12 months, there is no reason to have a large chunk of it in your portfolio," he told CNBC-TV18 in an interview, adding that investors should stick to high-beta sectors.