Tech stocks lose favour with domestic, foreign investors

Modest growth projections, coupled with currency turmoil, leads to cautious stance on sector.

Information technology (IT) stocks have lost favour with foreign investors, which collectively own 23 per cent of the market and 47 per cent of the free float.

In the December quarter, IT stocks emerged as the biggest underweight for foreign institutional investors (FIIs) and domestic institutions.

Institutional investors are considered overweight on a sector when their position is higher than the weight on the benchmark. 

Foreign investors are significantly underweight on Tier-I stocks, Infosys, Tata Consultancy Services (TCS) and Wipro. While slowing of inflows and outperformance could be the reason, the sector has also lost some of its sheen, of late, for other reasons. 

Nasscom expects sectoral revenue to grow 12-14 per cent in FY16. But companies have not met the upper end of the Nasscom's growth forecast (guidance) for the past four years.

Kotak Institutional Equities says the Big-4, Infosys, TCS, Wipro and HCL Tech, are likely to grow in line with the sector's growth for FY16.

These companies grew at higher than sector pace during FY02-08 but that of market share gains have slowed, as global players are ramping up delivery centres in India. 

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Other than slowing growth, FY16 is expected to be a difficult year for the sector, thanks to currency volatility. How the dollar moves against the rupee and a basket of other currencies will impact the reported rupee revenues and margins.

And, though Europe is expected to help Indian vendors grow revenue, the currency impact will hurt. Indian vendors derive 31-48 per cent of sales from Europe, compared to 18 per cent for Cognizant.

Despite this, Cognizant reported a 1 per cent impact in the December quarter on revenues and two per cent impact on the 2015 expectation, says Jefferies. 

The brokerage explains cross-currency impact itself could be magnified by the potential structural changes to the demand environment in Europe, due to diminishing cost arbitrage over the medium term. 

As the revenue growth of Wipro and Infosys lags the sector's, analysts claim they are the least favoured picks.

Another parameter analysts are looking at is the headcount addition, to gauge the health of the sector.

In 2014, the net headcount addition was 230,000, taking the total to 3.5 million. Kotak Institutional Equities says the total annual supply of talent is one million, suggesting oversupply in the system.

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