— Selective buying is the best strategy in IT industry.
— Infosys, HCL technologies, TCS and CMC appear to be better bets for investments.
— Infotech enterprises, Mindtree and NIIT technologies may be better avoided.
As always, IT stocks have begun declaring results for the latest concluded quarter of 2013 December. Aided by falling rupee and appreciating dollar IT stocks are expected to declare better performance and profitability in this quarter. In line with general anticipation leading companies, that have announced quarterly results so far, declared improved margins and profitability.
8 out of 20 companies included in the index have announced their results so far by the time this article is published. Though 12 companies are yet to announce their results, the combined net profit of all the companies included in the index has gone up already by 7% indicating the strength of this sector. Though some companies included in this index have been discredited or affected by adverse developments in the marketplace, the index is dominated by heavyweights in IT industry.
The graph given below clearly shows the resilience of IT industry in India with rising Profit After Taxes or EPS with just eight companies announcing results. Historically IT index was discounted at a P/E multiple of 24. Despite improved margins and better visibility for businesses going forward, the index is trading at a multiple of 22.35 indicating a scope of around 10% upwards from the current level. As is the case with any index, market leaders included in the index should be trading at a multiple that is higher than the average for the whole index.
The bellwether company Infosys started off this season by announcing healthy results showing a steep increase in profit after taxes (PAT) represented by EPS in the graph below. With such a healthy improvement in profits quarter after quarter and being a market leader and a strong favourite for FIIs, it is natural to expect this stock to seek even higher prices in the days to come. Even if the stock is given the index average P/E multiple of 24, there is a scope for a minimum of 15% depreciation from the current levels.
CMC Ltd has become a Tata enterprise long before. Being engaged in IT services with significant presence in India, this company does not have a big advantage coming its way with falling rupee and appreciating dollar. Despite that CMC Ltd reported better margins but has seen its stock price dropping in disappointment and disapproval. The divergences noticed between EPS and stock price clearly throws an opportunity to the discerning eye. With a P/E multiple of 17.89 and backed by strong operating margins, this stock also offers a minimum of 10 to 15% upside from the current levels.
HCL technologies has been consistently growing its profits in the last couple of years. Markets have taken notice of the stock and supported its price by giving a higher P/E multiple of 19.60 versus 16.67 barely a year ago. Despite attracting a higher P/E multiple, backed by a robust performance this stock also offers further room to grow and one can anticipate a minimum of 10% return from the current levels.
Infotech enterprises has reported a slight improvement in its profits with EPS rising from 20.78 to 21.19 on trailing 12 month basis. Such a small increase in its profits on TTM basis do not warrant such a steep rise in the stock price. When the reality sinks in the minds of investors, the price of the stock may see some correction or only consolation may happen. Considering the fact that P/E multiple of the stock has gone up from 8.42 to reach 16.92 in one year, it is better to apply caution before committing any money on the stock.
Mindtree also announced results and its EPS on DTM basis has dropped from 106.03 to 103.57. PE multiple in last one year has gone up from a level of around 10 to 13.86 backed by strong performance till a quarter before 2013 December. Considering the drop in profits and increased P/E multiple the stock appears fully priced and offers little scope for growth from the current levels.
TCS Ltd has reported a spectacular performance with its trailing 12 months EPS jumping from 80.63 to 89.75. Such a robust growth in earnings and being the undisputed market leader in IT industry, TCS is sure to attract a lot of attention from FIIs and mutual funds. Though it’s P/E ratio is more than IT industry’s average historic PE of 24, going by the visibility in business and confidence shown by the management, this stock is very likely to appreciate by a minimum of 15% from the current levels.
NIIT technologies also has announced results for the quarter 2013 December showing a drop in its EPS slightly. However this stock attracted a lot of investment in line with the other IT stocks from retail investors. Considering the lacklustre performance given by the stock, further price rise from the current level seems very difficult.
From the limited analysis of the results declared by IT companies so far, it must be remembered that a close analysis of working results of all the companies must be undertaken before committing money blindly. While companies reporting better performance are likely to reward investors with handsome gains in short-term, other companies may be a source of disappointment and result in significant erosion of portfolio values. We shall evaluate IT industry after all the companies in the index announces results in about 45 days time.