Funds foresee 10-20% fall in IT shares

Institutional investors are neutral or underweight on Indian information technology (IT) stocks and a majority of them think that these stocks could see another 10-20% correction in their valuation in the next 6-9 months.

This came out in a survey by foreign brokerage CLSA Asia Pacific whose analysts spoke to as many as 48 fund houses from across eight countries who together have an investment exposure of over $45 billion in Indian equities.

Over 80% of these investors are either neutral or underweight on the sector.

“Conversations with these investors indicated a sense of confusion on what to do with these stocks at current levels,” CLSA analysts Nimish Joshi and Arati Mishra commented on the survey in their latest sector client note. “Most investors seem to be choosing not to act at all.”

Nearly 80% of the fund houses thought that the valuation of tier-I IT stocks such as Tata Consultancy Services, Infosys and Wipro will either remain unchanged or deteriorate further in the next 6-9months. A 10-20% deterioration is what they are expecting.

Infosys remains the most preffered stock, while the fund managers said that there is a relatively high risk perception regarding TCS, which have been growing very fast but the high exposure to financial services client and the US market makes them vulnerable to the ongoing economic volatility in that country.

Wipro was the least preferred among the front-line stocks. According to some of the fund managers that CLSA surveyed, Wipro’s underperformance through 2010 and resultant valuation discount had attracted some of them towards the stock but the continued underperformance through 2011 has reduced their willingness to give the stock any benefit of doubt, at least for now.

While aggressive growth at HCL Technologies has got the attention of most investors, they would rather wait for sustained performance, especially on the profitability front before actually taking any exposure. Current macro worries and the risk aversion tendency makes HCL a “no-go area for now”, CLSA analysts reported from the survey.

To be sure there has been some bouyancy in the IT stocks over the past couple of trading session, but analysts believe it will be short lived and investors could even end up losing money. The buoyancy has been driven by local currency depreciating against dollar. As Indian IT firms earns majority of their revenue in US dollars, depreciating local currency is expected to give these firms an earnings boost as they start announcing September quarter results in October.

“We see this as a risky, short-term trade as the assumption behind it is that currency rates will be sustained at current levels,” noted Abhiram Eleswarapu of BNP Paribas Securities

“Should they reverse course, investors could be faced with a double-whammy of weakening demand and adverse foreign exchange.”

The only ray of hope in the survey is the hint from fund managers about their re-entry triggers.

The surveyed funds said that an 8-10% correction in frontline IT stocks could drive some of them to start buying these stocks.