Should you keep ridin'g the IT bus ?

photo:Nikhil Khade

Should you cash out ?
IT offshore companies have delivered about 50 to 80 % returns last couple of months. Particularly frontline IT stocks like TCS,Infosys have delivered good numbers and stocks have run up in a jiffy. The obvious question is -should you continue to ride or get off the IT bus?

Bullish case – IT is a play on global recovery as the markets are stabilizing the worst is behind us. As the economy improves more work will be offshored by companies looking to reduce cost. IT companies are zero or low debt and make for a good long term investment.

Bearish case – The recovery will be long and companies may not be able to deliver better results going forward. Customers will be demanding price reductions and volume pickup will be slow due to protracted global recovery. The stocks are already pricing in 20 to 30% growth so valuation look stretched.

So what’s the simple idea for you to make money?
The revenue growth delivered is in the range of 10 to 12% and profit growth is around 17 to 19%. Companies have delivered better majorly on basis of reducing expenses which if reduced beyond a threshold may have a negative impact.Althow i dont see that happening but the point is cost cannot be reduced beyond a limit.

At 20 to 22 times current year earnings the risk reward is in favor of bearish case, you may already be in final leg of the IT rally. The stocks may not sell off a lot but major part of stock price rise is over and done for 2009 I guess.Its prudent to look for better bargains rather than waiting for the stock to reach a particular price point.


You can use this rally to get out of these expensive frontline stocks into midcap trading at a discount. However the catch there is you need to be choosy here.( earnings are more volatile for these stocks). I would prefer to move into some financial or consumer oriented stocks at reasonable valuations.

What are your thoughts ? I would love to hear from you? !! lemme know