IT stocks reflect overconfidence about strong US recovery
Investors seem to be setting themselves up for disappointment after the sharp rally in IT stocks this year
First Published: Wed, Mar 13 2013. 11 42 AM IST
IT shares have rallied since January, thanks to a relatively decent earnings season, positive post-results commentary from companies and encouraging news flow. Photo: Mint
Also Read
Updated: Wed, Mar 13 2013. 08 30 PM IST
The National Stock Exchange’s CNX IT index and shares of Tata Consultancy Services Ltd (TCS)
have both declined by around 3% in the past three trading sessions. But
they continue to trade around 20% higher compared with their valuations
two months ago and need to correct more.
Investors appear perturbed (although not enough) by TCS’s
comments in an analysts’ briefing last Friday that it expects fiscal
2013-14 to be moderately better than the current fiscal. TCS is likely
to end the current year with growth of between 13% and 14% in dollar
terms. The company’s shares, meanwhile, trade at 20 times estimated
earnings for FY14, and are factoring in substantially higher growth
rates.
Analysts at Nomura Research point out that the outlook
for the current quarter should disappoint the Street as well: “The
management expects FY13 dollar revenue growth to be in line with earlier
indications of 14% or the top-end of Nasscom’s initial forecast. This
effectively implies sequential growth of 3.5% in the fourth quarter in
our view, which is similar to the 3.3% (2.7% in constant currency terms)
growth in the December quarter. We believe this would be negative for
the stock as the Street has been building in a better 4Q, with dollar
revenue growth in excess of 4% quarter-on-quarter.”
IT shares have rallied since January, thanks to a
relatively decent earnings season, positive post-results commentary from
companies and encouraging news flow. Last week, for instance, the US
labour department announced that the number of Americans filing new
claims for unemployment benefits fell for the second straight week,
against Street expectations of a rise. Of course, it remains to be seen
if the trend is sustained. But these initial signs of increased hiring
augur well for the outsourcing industry. What about the fiscal
tightening measures of the US government? According to an analyst, given
the fact that Indian IT companies have barely any exposure to
government projects, the impact will be minimal.
Having said all that, IT stocks have run ahead of
fundamentals. True, some stocks such as TCS are more richly valued than
others, while others may be still reasonable. But on the whole,
investors seem to be setting themselves up for disappointment after the
sharp rally this year.
IT shares have rallied since January, thanks to a relatively decent earnings season, positive post-results commentary from companies and encouraging news flow. Photo: Mint
Also Read
Updated: Wed, Mar 13 2013. 08 30 PM IST
The National Stock Exchange’s CNX IT index and shares of Tata Consultancy Services Ltd (TCS)
have both declined by around 3% in the past three trading sessions. But
they continue to trade around 20% higher compared with their valuations
two months ago and need to correct more.
Investors appear perturbed (although not enough) by TCS’s
comments in an analysts’ briefing last Friday that it expects fiscal
2013-14 to be moderately better than the current fiscal. TCS is likely
to end the current year with growth of between 13% and 14% in dollar
terms. The company’s shares, meanwhile, trade at 20 times estimated
earnings for FY14, and are factoring in substantially higher growth
rates.
Analysts at Nomura Research point out that the outlook
for the current quarter should disappoint the Street as well: “The
management expects FY13 dollar revenue growth to be in line with earlier
indications of 14% or the top-end of Nasscom’s initial forecast. This
effectively implies sequential growth of 3.5% in the fourth quarter in
our view, which is similar to the 3.3% (2.7% in constant currency terms)
growth in the December quarter. We believe this would be negative for
the stock as the Street has been building in a better 4Q, with dollar
revenue growth in excess of 4% quarter-on-quarter.”
IT shares have rallied since January, thanks to a
relatively decent earnings season, positive post-results commentary from
companies and encouraging news flow. Last week, for instance, the US
labour department announced that the number of Americans filing new
claims for unemployment benefits fell for the second straight week,
against Street expectations of a rise. Of course, it remains to be seen
if the trend is sustained. But these initial signs of increased hiring
augur well for the outsourcing industry. What about the fiscal
tightening measures of the US government? According to an analyst, given
the fact that Indian IT companies have barely any exposure to
government projects, the impact will be minimal.
Having said all that, IT stocks have run ahead of
fundamentals. True, some stocks such as TCS are more richly valued than
others, while others may be still reasonable. But on the whole,
investors seem to be setting themselves up for disappointment after the
sharp rally this year.
priya singh pgdm
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