For 2nd yr, IT index trails benchmarks

Written by fe Bureau | Mumbai | Updated: Dec 11 2012, 05:41am hrs
Slow growth in offshore mkts weighs

The returns given by the IT index, comprising shares of Indian software companies, continued to lag the broader benchmark indices for the second year in a row as subdued economic growth in offshore markets led to a cut in technology spends, impacting earnings of several IT majors.

According to Bloomberg, the CNX IT index has given negative returns of nearly 3% for the last one year against positive returns of 22% by the 50-share NSE Nifty.

Over the last two years, the CNX IT index has given returns of -13.7% against -1.2% given by the Nifty. Just last week, IT major Cognizant's regulatory disclosure on executive compensation suggested slower revenue growth in 2013 for the firm, leading to concerns over the industry's growth potential in the coming year.

Experts say many tier-I Indian IT companies experienced headwinds due to uncertain macro-economic conditions globally which hindered volume growth as well as a slowdown in off-shoring work in these countries. Sluggish growth in the banking, financial services and insurance (BFSI) industry from which IT companies derive the maximum revenue led to an industry-wide slowdown in IT spending, they said.

Lower growth rate led to some amount of contraction and affected earnings, all of which has forced companies to lower their FY13 guidance to 14-15% from 20-25% a year ago, said Rikesh Parikh, VP, markets strategy, equities, Motilal Oswal Financial Services, who has reiterated his neutral view on IT stocks.

Analysts also cite the sharp fall in index heavyweights like Infosys and Wipro, as a reason for the dismal performance of the IT index. According to the NSE, the big four IT companies Infosys (46.10%), TCS (26.06%), Wipro (8.20%), and HCL (6.74%) account for over 85% of the index weightage.

Many IT stocks traded at high premiums to benchmark indices. While TCS continued to surprise the market, Infosys disappointed the Street with its quarterly results for the last 5-6 quarters. Infosys did not deserve to trade at such a high premium (35-40%) to the benchmark indices after posting dismal results and lowering revenue growth guidance, said Ankita Somani, analyst, Angel Broking.

Somani said if the challenges continued, many scrips could face de-rating. Over a three-year period, CNX IT index has given returns of 13.24% against 18% of Nifty.

While several industry bodies remained optimistic and anticipated IT exports to grow 10-15% for the financial year ending March 2013, market experts were concerned on the revenue growth trajectory of many IT companies, especially Infosys.