Technology Funds High On Rupee Slide, Global IT Services Growth

Technology funds have made a comeback in the past year, emerging as the top category performer among equity schemes.

For a one-year period, these funds have returned 16.8 per cent, beating other sectoral funds comfortably.

Banking, pharma, and infrastructure funds have performed abysmally, returning -4.7 per cent, -2.5 per cent and -22 per cent, respectively.

Technology funds have also beaten large, multi, mid- and small-cap categories, which have all given negative returns in the past year. Tata Digital India Fund, for instance, has been the top performer with one-year returns of 24 per cent.

“We expect CY19 to be a much better year than CY18 for most tier-1 Indian IT firms on mounting evidence of stronger deal activity and revenue conversion. Indian firms are steadily regaining share from global peers and boutique firms,” said a recent report by CLSA.

In CY18, the CNX IT Index outperformed the broader market by 21 per cent. The key factors that led to the 2018 rally in IT stocks include the rupee depreciation, sector under-ownership by domestic institutional investors and attractive payout yields.

The rupee depreciated 8.4 per cent to 69.77 against the dollar in 2018, and fell 2.27 per cent this year.

Gartner expects global IT services to grow at 4.7-4.8 per cent year-on-year (YoY) in CY19 and CY20 whereas IDC hopes global IT services will grow 3.5 per cent YoY and offshore services at 8 per cent in CY19.

“We expect growth acceleration of 130 basis points in constant currency YoY growth of top six Indian IT firms from 8.3 per cent in FY19 to 9.6 per cent in FY20 and 270 bps acceleration in US dollar revenue growth,” observed CLSA.

According to industry players, information technology was an under-owned sector for quite some time and fund managers as well as foreign portfolio investors have stepped up buying in these stocks in the past few months.

According to brokerage Emkay, the sector completed a full cycle in the last 12 months: from depressed valuations in December 2017 to some irrational exuberance by September 2018, and then to a rerating of stretched valuations, with rationality prevailing in the end.

Analysts are still overweight on the technology sector, given the growth certainty and favorable valuations on a price/earnings to growth ratio or PEG basis. “The (domestic) funds are still underweight despite attractive valuations on a PEG basis; and although effective yields are down, large-cap yields still remain attractive at 2-4 per cent,” said a note by Emkay.

The brokerage warns that digital will not be margin-accretive as technology is deflationary by nature. Digital services, like other segments in the past, would get commoditised with scale, and will turn deflationary.

Large deal activity has risen sharply for top-5 Indian IT firms over the six quarters in the number of deals and value, suggesting market-share gains, adds CLSA.

The three key industry verticals seeing growth acceleration include BFSI, retail and consumer, and telecom/media. – Business Standard