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Why are IT stocks in demand
In the last three months, the BSE Sensex gained only 2.75%. In contrast, the BSE IT index jumped 15.51%. This shows the market’s preference for IT stocks, especially at a time of great volatility and fluctuation.
Here’s why the Street is increasingly preferring IT stocks:
Indian IT companies earn a major portion of their revenues from foreign markets. This means that they earn in foreign currencies. With the rupee’s depreciation in 2013, export-oriented companies like IT earn more when converted into rupee. In contrast, companies that are dependent on domestic demand cannot avail the benefits of rupee depreciation. This is one of the key reasons for the preference for IT stocks. According to industry body Nasscom, exports are expected to rise 13% in the current fiscal and 15% in the coming fiscal year.
US and Europe demand:
The two regions are the biggest markets for Indian IT companies. US alone contributes to the two-third of India’s total IT exports of $76 billion. Most companies are increasingly optimistic about the business environment in the US, according to a Kotak Securities report. This means more US businesses will spend for IT services, driving up revenue. Also, European clients are also more willing to hand out contracts to offshore IT companies. Exports to Europe are expected to grow 14% in this fiscal, according to Nasscom. This means that Indian IT companies are penetrating the market further. An increase in demand is likely to help fuel revenue growth for the Indian IT companies.
Most companies are confident about meeting revenue growth targets. The industry as a whole is expected to report a 13-15% growth in revenues this fiscal, according to Nasscom. This is likely to get a boost by Indian IT players’ increasing penetration in markets like the BPO and Information Management System world over. They are also fast adopting new services like cloud computing, mobility, data analytics and social media, which are in great demand. These mean additional sources of revenue for the Indian IT. “We see limited growth headwinds, while timely investments can help lay the foundation for the next phase of growth for Indian IT,” the Kotak Securities report said.
IT sector stocks are trading at a price earnings multiple or PE of 16.8 times expected earnings per share for 2014-15, according to the Kotak Securities report updated after December 2013 quarter results. This is a multiple of profit that IT companies are expected to make for the year to March 2015. Other stocks tracked by Kotak Securities are trading at 12.3 times. This means IT sector stocks are trading at a premium over their expected profit and that investors are willing to pay more money. This is because the profit growth or earnings per share growth of IT sector stocks is likely to be 17.4% for the year to March 2015. Other sector stocks tracked by Kotak Securities are likely to report a 16.4% growth, slower than the IT sector.