For a long time now, Indian IT companies have had to contend with a rising rupee and shrinking margins. But not any more. With the rupee hitting a new low of Rs 43.92 on August 29, 2008, the fortunes of IT companies have taken a turn for the better—and IT stocks have started to perk up. Last month, the BSE IT Index rose 2.5 per cent even while the frontline BSE Sensex dipped 1.2 per cent.
While a strong dollar is good for tech companies in general, not many IT stocks make the investment-grade. That’s because their business environment still looks weak due to the slowdown in the US. Further, the valuation gap between the large-cap IT companies and those in Tier II has increased.
A recent report by India Infoline says that the valuation discount between Infosys Technologies and Satyam Computer Services has expanded from 15 per cent in April 2008 to 26.8 per cent at present. The report mentions that Tier-II companies, such as Satyam, HCL Technologies and Tech Mahindra, are better placed than the top three companies—Infosys Technologies, TCS and Wipro. This is because of the increasing valuation gap between the top players and the Tier-II companies.
“Notwithstanding the relatively better fundamentals, Tier-II large companies’ valuations in terms of P-E and P-B multiples for 2009-10 are at a significant discount of 34.4 per cent (9.6x vs 14.6x) and 35 per cent (2.6x vs 3.9x), respectively. Existing discounted valuations factor a bit of exaggerated risks to their earnings growth and we expect this aberration to correct over the next couple of quarters,” the report says. India Infoline is overweight on HCL Tech, Tech Mahindra and Satyam and underweight on Wipro, Infosys and TCS.