Indian IT shares trade at record highs despite stock market gloom

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Shares of India’s top information technology companies are trading at record highs despite the overall gloom in the country’s stocks, as investors bet they can better withstand a domestic slowdown and capitalise on a boom in global businesses adopting next-generation technology.

IT companies such as Infosys and Wipro made their names from the 1980s by outsourcing time-consuming back-office processes for US and European companies.

They later fell out of favour with many investors as they lagged behind nimbler global competitors offering cutting-edge technology to clients — their share prices have stagnated for years. 

But traders have flocked back to the companies in recent months despite turbulence in the stock market.

Infosys’ shares are trading at a record high, up more than 25 per cent since the start of 2019. Tata Consultancy Services, up a fifth this year, is trading just shy of a recent all-time high while Wipro peaked in June but is holding on to 2019 gains.

The benchmark Nifty 50 index, meanwhile, is down 11 per cent from a high in June and has given up its gains for the year. 

Pankaj Kapoor, executive director at investment bank JM Financial, said that the outsourcers’ global reach should help shield them from slowing growth at home, which has strained other sectors such as automobiles and banking.

But Mr Kapoor said the companies were also seen as a wise longer-term bet as multinationals adapt their operations to artificial intelligence, internet of things and 5G communications technologies.

The IT companies argue that the imminent rollout of 5G technology globally, for example, is creating an opportunity. Given their size and experience, companies such as Infosys or TCS are well placed to help telecoms operators with the resource-intensive process of updating their systems. 

Revenue from digital operations for both Infosys and TCS grew over 40 per cent in the June quarter from a year earlier, and Wipro’s grew 34 per cent. TCS, for example, last year nabbed a deal with Marks and Spencer to upgrade the UK retailer’s operations.

“Businesses large and small around the world are now dealing with how to become much more digital,” Nandan Nilekani, Infosys’s co-founder and non-executive chairman, told the Financial Times.

“That is playing to the strengths of a company like Infosys, because Infosys has been able to really develop those digital skills which are in high demand around the world,” he added. 

But analysts said the India’s IT companies faced a number of headwinds in the near term.

The firms’ global nature leaves them exposed to a slowdown in global growth due to the trade war between the US and China, according to Nomura. And those with a large UK presence are sensitive to the disruptive shock of a no-deal Brexit. 

Given their record levels, analysts said the stocks were also at high valuations and vulnerable to a correction.

But IT executives such as KR Sanjiv, Wipro’s chief technology officer, are bullish about the potential of their digital investments. “We are sitting on an opportunity that is far greater than it ever was,” he said.

2019-09-05 03:12:02

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