Foreign investors bet big on IT stocks in Dec quarter

During the quarter ended December, foreign investors aggressively raised their shareholding in Indian information technology (IT) companies, especially mid- and small-sized ones, according to shareholding data.

The increase in exposure to IT companies, despite a sharp rise in their stock prices in recent months, shows the positive momentum seen in the sector last year may continue, say analysts.

Since October, the National Stock Exchange (NSE) CNX IT index has rallied about 20 per cent, against a nine per cent rise in the benchmark Nifty. “IT service providers will have another good year, driven by the global recovery. It continues to remain one of our top overweights,” said Abhay Laijawala, managing director and head of research, Deutsche Equities India.

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Ravi Shenoy, assistant vice-president (mid-cap research), Motilal Oswal Securities, said, “The rupee-depreciation tailwind is reflected in the performance of IT companies. Also, discretionary spending, earlier on hold, is returning. This is driving deal momentum, as evident in Infosys numbers. This momentum will be seen in the sector as a whole.”

Backed by growth across verticals and in non-US geographies, Infosys posted 21.4 per cent year-on-year growth in net profit at Rs 2,875 crore in the December quarter. The company’s revenue increased 25 per cent to Rs 13,026 crore.

In the December quarter, foreign institutional investors (FIIs) raised stakes across technology firms to record levels. The steepest rise was seen in the case of second-line companies such as Tech Mahindra, eClerx Services and Polaris Financial Technologies.

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Experts said investors were looking beyond the top four IT companies, as gains in that space were likely to be higher.

Infosys Technologies and Wipro, two of the ‘big four’ IT companies, saw a percentage point rise in FII holdings each, while mid-cap firms such as Persistent Systems, Polaris Financial Technologies, eClerx Services and NIIT Technologies saw an increase of three-four percentage points each.

Tata Consultancy Services (TCS) and HCL Technologies are yet to announce their December quarter shareholding data.

Shenoy said investors were opting for mid-cap companies, as these usually outperformed large-caps in profit growth. “All IT stocks have a similar kind of earnings momentum. However, as the operating leverage in second-line stocks is far higher, their profits increase faster. The frontline companies have already rallied,” he said.

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The highest increase in shareholding was seen in the case of Tech Mahindra — it rose eight percentage points to 40.42 per cent. Aggressively buying by foreign investors saw the Mahindra group firm’s share price rise about 40 per cent during the December quarter.

The NSE IT index is hovering close to its life-time high. On Monday, it breached the 10,000-mark for the first time. On Tuesday, the index closed at 9,996.8, down 0.63 per cent, even as the benchmark Nifty saw a fall of 0.49 per cent.

“The clarity on budgets for 2014 has already been communicated to the analyst community. Most analysts are making estimates for 2015-16. The outlook is definitely positive,” said an analyst on condition of anonymity. Analysts said the IT sector wasn’t a defensive bet, as perceived by many, but a growth story led by a recovery in the developed world.