Why are IT stocks outperforming

The Infotech industry faces headwinds but it also has some factors running in its favour at the moment. One issue is that the dollar has lost a lot of ground over the past year. Indian information technology (IT) companies derive the bulk of their revenues from the US. The weaker the dollar, the less that income translates to, in rupee terms. Also, given that the rupee has gained significantly versus dollar, the Indian IT firms could lose their competitiveness to some degree.

That's one problem. The second problem is that there have been continuous fears about the loss of H1B visa quotas. That uncertainty has already forced Indian companies to hire more US citizens which means that wage bills have inflated.

The Trump Administration is also apparently determined to raise the barriers against immigration. There have been attempts to prevent spouses of H1B visa holders from working and also a proposal, since shot down by the courts, to deport people who have been in the queue for green cards for over a certain length of time, etc. This makes the Indian model of getting workers into the US less attractive since there could be restrictions on family, etc. 

The third problem of course, is that the India IT services industry is still struggling to adapt to the new era of Artificial Intelligence, Digital services and the cloud. Those are less labour-intensive technologies and Indian IT companies cannot simply leverage their advantage in terms of labour arbitrage. 

Balanced against this, there is the simple fact that global growth rates have improved. This means that there could be larger investments in IT across industries and regions. If the pie expands, it has to be good for Indian IT firms at some level. Apart from North America, business prospects for the It industry have improved in the Eurozone, even though many Indian firms headquartered in the UK might be compelled to shift bases due to Brexit. 

The Q3 results from some of the top companies are all worth looking at, from this context. Infosys saw a massive jump in net profit due to the reversal of a tax provision. If that is adjusted for, net profits were flat, quarter-on-quarter. Guidance for the full-year was maintained, with single-digit revenue growth expected. TCS saw a year-on-year fall in net profits and about 1 per cent growth in revenues. India's #1 It services firm fell below consensus for something like 10 successive quarters. Both Infosys and TCS have stepped up the hiring of overseas employees, which is referred to as "localisation" in the industry jargon.  

Wipro saw stagnant revenues and profit growth for Q3, while HCL Tech did much better than the other IT majors with 14 per cent revenue growth year on year (y-o-y). HCL Tech has done several intellectual property partnerships with IBM, putting $780 million into five such partnerships. Revenue from those deals currently amount to about $200 million. It's unclear if this a great idea, but it is part of an intended 15-year partnership.

Growth still appears to be sluggish. Will there be a pick-up driven by stronger global growth? That's what most analysts are projecting but it's noteworthy that similar projections were made for 2017-18 and don't seem to have worked out yet. 

The industry index has certainly outperformed the broader market in the past month or so. The Nifty IT Index is up by about 13 per cent in the past 30 days while the Nifty is up by about 5 per cent. This could be a sign that investors are buying the guidance. Or it could simply be due to rotation of funds into a sector that has underperformed for a while.

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