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Last Updated : Nov 26, 2018 12:33 PM IST | Source: Moneycontrol.com

IT Sector: Not a growth story but attractive valuation to limit downside

Also, rupee depreciation gains or appreciation loss gets passed on to clients in terms of changes in re- agreements in pricing and hence full benefits or loss due to rupee does not translate into actual profit or loss

Moneycontrol Contributor @moneycontrolcom

Vineeta Sharma

IT sector has seen sharp swings in sentiment over the last six months due to sharp volatile movement in rupee that in turn had fluctuating fortunes owing to even more sharp swings in Brent crude price.

Prices of major IT stocks have exhibited similar movements. But the margin of IT companies does not have a major correlation with the rupee.

Most companies follow a fixed hedging policy for 6-9 months and that takes away benefit or loss arising out of rupee movement. Also, rupee depreciation gains or appreciation loss gets passed on to clients in terms of changes in agreements in pricing and hence full benefits or loss due to rupee does not translate into actual profit or loss.

Key to the fortune of Indian IT companies remains traction in BFSI space globally, the adoption of digital era which demands changes in products and services as well as changes in execution methodology, pricing mechanism, and other internal operations. Recently, the BSFI has seen an increased uptick in demand from cloud migration, microservices and intelligence automation.

Retail and energy segment continue to contribute healthy, healthcare is seeing pressures while telecom is seeing new deal wins. The deal momentum continues to be strong from the US, though UK and Europe still need to catch up.

The digital share of revenues has increased to the range of 30-50 percent for most companies wherein there is continued demand in the cloud, IoT, cyber and data and analytics.

Challenges that IT sector faces now are increased investment in technology for building digital capabilities, people training and re-skilling of employee base on digital technology, talent shortage of in the US and constrained H-1B availability and increased rejection thereto.

These challenges have led to increasing costs and hence affecting the ever rising and sustainable margins of companies.

There has been sustained increase in the subcontracting costs and onsite localisation has led to further cost push. Huge training and investment are being made on people to match the demand requirement of companies which may otherwise result in order cancellation, delayed decisions and slow down in re-selling and deal renewals.

IT sector companies should maintain high single-digit growth on the back of deal wins while margins will see some pressure going forward. Operational improvement and right deliveries remain the key.

IT sector is not a growth story anymore though attractive valuation will limit downside particularly for large cap IT stocks with strong cash flow positions and proven management.

The author is head of research at Narnolia Financial Advisors.

Disclaimer: The views and investment tips expressed by investment experts/broking houses/rating agencies on Moneycontrol are their own, and not that of the website or its management. Moneycontrol advises users to check with certified experts before taking any investment decisions.
First Published on Nov 26, 2018 12:33 pm
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