Views on whether IT Sector is still good

Information technology sector has been a consistent player in the calendar years 04-05,05-06 and 06-07. The sector has been giving returns in the range of 51.37-32.69% as compared to sectors like capital goods, consumer durables, FMCG and pharma.

But the current scenario does not look too exciting for the sector. Between February 12 and yesterday, IT was one of the worst hit sectors. It fell by 11.1% with stocks like Financial Tech losing gains by 18.50%, Infosys by 14.63%, Wipro by 14.60% and Hexaware Tech by 14.15%.

The weak trend still seems to be continuing as it pulled the markets down in afternoon trade. IT sector was considered a defensive sector by analysts as it is a sector which is not impacted by factors like inflation and interest rates. The only risks can be any slowdown or uncertainty in IT spend in the US which is the largest market for Indian IT services and any significant appreciation of the rupee vis-à-vis the dollar which will be detrimental to margins of IT service companies.

Budgetary proposals also played the spoilsport for the sector. Proposals like 11.2% MAT and non-extension of STP benefits beyond 2009, did not go down well with the companies. Analysts feel that these are likely to have a negative impact on medium and smaller sized companies more than on large cap IT companies.

So, has the IT sector lost its charm? Experts are divided in their opinion. Some consider the sector still attractive while others feel that the sector will be on a downtrend for some time now.

Experts like Gautam Shah of JMMS Tech believe that tech stocks may see a further slide. Shah, said, "I guess for current levels, we could see a 15-20% drop in the stocks that have done well in the last few months. Hence any pullback, if it continues in the next few trading session, will definitely be a sell on technology."

While Sudarshan Sukhani believes that one can still make money in IT stocks with a long term perspective. He said, "IT was always a favourite sector and the first move should have come from that sector and which it did. I would still feel that at some point, it would be wiser to pay attention on the midcap IT space, where bigger moves are possible. But given the condition of market, these moves should be sustained and somebody who can actually buy on a dip, keep a stoploss, should still make money on the long side."

Narayan Ramachandran, MD of Morgan Stanley, is also in the latter group of experts who feel IT is still a strong sector. He said, "We are into the cycle and the temptation is constantly to dip into smallcaps. But one of the things I have learned over the years is try to refrain from that temptation, except when it is completely down and out and at the bottom of the cycle.

So in the middle of the cycle, I think the key operative words would be find stocks that have earnings visibility, earnings stability and sort of a business model that can carry them not across only this cycle, but across futures cycle as well. That’s where companies like telecom, technology stand out."

Even though at the moment there are negatives playing in the sector but it is believed that the sector is bound to get stronger and stronger. According to Emkay Shares and Stock Broker's research report, IT sector is well poised to cross USD 60 bn by 2010.

According to the firm, the enviromrnt is getting more robust and companies with strong business model and niche offerings, are well poised to reach the higher growth trajectory in the coming years. Hence, with no structural changes in the Indian IT sector fundamentals, they maintain their bullish stance on the sector for the year ahead.

Their top picks are Infosys, Paradyne Infotech,Tata Elxsi, Tanla Solutions, NIIT Technologies, Tech Mahindra.