As the stocks are pounded mercilessly by a host of negative factors including global economic slowdown, cut in spending in infrastructure projects, relentless erosion in the value of the Indian rupee and rising inflation, investors are left wondering as to which sector would offer them a safe investment window.
The FMCG stocks has shown commendable resilience but they appear to have run up a bit already and any further upturn in their price looks to be doubtful at present.
It is in such a scenario that IT stocks have come to be viewed as a last refuge for harried investors – particularly the four frontline IT stocks – Infosys, TCS, Wipro and HCL Tech. Apart from their own inherent strengths, what seems to have worked to their advantage is the fact that being largely export driven, these companies would benefit from the erosion in the value of the Indian currency against US $.
It is true that this may be a double edged weapon in that the way these IT companies have hedged their position against exchange rate fluctuation would be of crucial importance as how the depreciation in Indian rupee would impact their financial performance in the last two quarters of the year. More importantly as IT professionals are high spenders, the performance of the IT industry would have a bearing on hiring and wage hikes that would influence to some extent the performance of many industries like automobiles, housing, lifestyle products etc.
In an interview to Business Line , Mr D. K. Aggarwal, CMD, SMC Investments and Advisors Ltd, shares his thoughts on the issue of IT stocks as a safe investment bet and what to pick.
The frontline IT stocks are being looked upon as a safer investment bet in the current market scenario. Is that the right view? If so why?
The frontline IT stocks can offer relative safety in the current market conditions, due to visibility on revenues and rupee weakness.
Do you expect the key software stocks-Infy, TCS, Wipro and HCL Tech- to maintain the growth momentum and the margin? What is the growth expectation in the last two quarters of current fiscal?
Growth momentum can be expected to continue as rupee is weakening. Some pressure can be expected on new revenues due to ongoing European crisis. Overall, one can expect IT companies to do well as they have handled 2008 crisis also quite well.
Which among these stocks do you prefer and why?
We are bullish on Infosys and TCS. As Wipro is going through management restructuring, it may take 2-3 quarters more to result in better performance.
How dependent are these companies on the EU nations for their business. How do you expect the developments there to impact them?
About 15-20 per cent of the revenue comes from Europe for most IT companies. Considering the on going EU crisis, one can expect pressure on revenues of IT companies to that extent.
There is a view that problems in foreign countries will help Indian IT companies as more outsourcing would be done to save costs. Is that right?
It may be true to some extent, but cannot be completely true. As the world markets have become interrelated, the problems in foreign countries can have some adverse impact on Indian IT companies.
There is a feeling that even if there is slowdown in growth, IT companies would benefit because of rupee depreciation. Does that make these stocks more investment worthy? Is that not a risky strategy?
As mentioned, rupee weakness is critical for IT companies. But, it shouldn't be the only basis to invest in IT companies. Even the underlying IT business is expected to do well; hence one can invest in these companies.
Do you expect the recruitment of the IT companies and the pay hikes to take a hit in India? How will that affect the sectors that depend on the spending of the IT professionals like real estate, life style products, auto/electronics, etc?
As of now, IT companies are indicating about their ongoing hiring plans. Currently, there may not be much impact on their hiring plans. However, recent announcement of Infosys that two Saturdays in each month will be working days reflect that IT companies are attempting innovative ways to handle this slowdown.