IT stocks – A value buy?

Time has finally come for IT stocks this year. After they have been beaten to death literally, there are voices, particularly from financial institutions, of VALUE BUYING. When did you last see the stock price of Infosys in 1500s? When did you last see the two year forward PE of Infosys trade below Grasim, inline with metal stocks and just a tad in premium to ONGC. Market participants are finally talking about how IT majors have managed to grow at 20%-25% against a rapidly appreciating rupee. They are now of the opinion that appreciation will pause or at worst slow. This gives an opportunity for IT companies to show how they run their companies.

The first sign of this was seen on Friday when not only the volumes traded on IT counters were robust but also the delivered quantity. When compared to 50 day averages, Infosys traded 1.5 times in volume while the delivery statistic was 1.6 times. The corresponding figures for Satyam were 1.9 & 2.2, Mphasis was 2.1 & 1.9 and Tech Mahindra was 2.8 & 2.

I was looking at another technical indicator, the average of 200 day stock price. Infosys was at a 12% discount to its 200 day average of Rs 1921. The discount of TCS was at just 7%, Iflex was at 26%, NIIT Tech at 29% and Tech Mahindra at 11%. Wipro, Satyam, HCL Tech and Mphasis were around their 200 day stock price averages.

Another interesting trend is that TCS & Wipro have closed in on Infosys’s valuation. While 2 year forward PE for Infosys was 17.5, that of TCS was 17.5 & of Wipro was 18. This is because of the aggressive inorganic growth strategy employed by latter two and the market likes it.

Finally, brokerage firms like JP Morgan & Edelweiss have given a VALUE BUY signal of IT majors in general and Infosys & TCS in particular. After Fed cuts interest rate tomorrow, the situation will be clear which way the liquidity flows and which way the rupee moves. I expect the IT stocks to start off the New Year celebrations.