In the last few days the markets have taken a retreat from their peak levels and throw questions on desirability of including a particular sector stocks into portfolio. This week we have seen the value of rupee falling steeply giving room to all of us in believing that the fortunes of exporters may turnaround for good in months to come. In this backdrop, we will review the position of IT stocks, by carefully reading the signals emerging out of CNX IT index.
Out of 20 companies included in this index, results of 18 companies have already been announced for the quarter ending in September 2013. When we compare the numbers of the whole index together as shown below, we notice that the profits have been rising consistently with the exception of a small dip during 2013 September, when the first few companies announced a drop in performance.
Compared with profits of these companies 18 months before, we noticed that the profit after tax for all companies put together has gone up by 27.93%. Cash profit also has shot up by 28.86% while operating profit has shown a significant jump of 50.25% in the same period. P/E ratio, which stood at 15.87 about an year back has followed the trend of increasing profits and reached a level of 20.59 as of today. However, the latest P/E ratio is still below the historic P/E ratio for last five years which stood at 24.03.
All these factors, when seen together makers us believe that there could be further upside in IT stocks so long as they continue to report better performance through increasing profits. With the faling rupee and monetary easing in US continuing, the future for next six months looks bright enough for all Indian IT companies. Therefore, if there be any dip in prices, one should look at it as an opportunity.
IT index constituted by CNX included three stocks which have been in the news for wrong reasons. They are Core Education, Educomp Solutions and Financial Technologies. These companies have reported either a bad performance or mediocre performance affecting the overall CNX IT index. However, despite the poor earnings from these companies, the profits of CNX IT continue to surge ahead. The graph below belongs to HCL technologies Ltd and as can be seen from the green line, the profits of this company are continuing to move upwards in the entire period and the price also kept pace with the improved performance. It is important to notice that this company has reported 145.45% improvement in profit after tax in the last 18 months. Operating profit jumped more than twofold in the same time.
The profits of bellwether company Infosys, have not gone up in the latest quarter but their revised guidance of likely better prospects have enthused the market and the stock price seemed to have found new vigour in the recent times. Infotech Enterprises has seen their profit falling for three quarters before the trend reversed in the latest quarter as shown in the graph below. Though their operating profit increased by only 26.35% in the last 18 months, their profit after tax has gone up by 53.65% in the same period encouraging investors to take a fresh look at the stock.
Tata consultancy and Tech Mahindra have shown resilience in their operations and have been growing their bottom line in a healthy way inspiring institutions, high net worth individuals and retail investors review these terms and turned positive.
Market capitalisation of companies like Tata consultancy, Infosys, HCL technologies and Tech Mahindra have helped the index stay in the positive since all these companies with the exception of Infosys have reported remarkable performance. Infosys has revised its guidance for future exuding confidence in operations into the future.
At this point of time, Tech Mahindra continues to be our Favourite at stock followed by Tata consultancy and HCL technologies respectively. Holding onto Infosys is a good move than to accumulate further shares. We are reasonably confident that investments in IT stocks as listed above will reward investors handsomely in the next one or two quarters.