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NIFTY IT Vs USD – Have Valuations Come Off A Bit Owing To Rupee Appreciation

NIFTY IT Vs USD – Have valuations come off a bit owing to Rupee Appreciation

The NIFTY IT Index has fallen around 4% since the start of October. The appreciation of the rupee has a direct bearing on the IT pack, a 1% appreciation in the rupee can lead to a 20-bps negative impact on the the operating performance of many IT companies. In terms of valuation, the FY19E P/E for most companies is trading below their 2 yr and 5yr avg valuation.

Some names have corrected even lower. Among large caps:

  • HCL tech at 13.4x is trading below its 5 yr avg of 17.6x,
  • Similarly CYIENT in the midcap space which is at a FY19E P/E of 14.9x is substantially lower than its 2yr & 5yr avg of 18x,
  • Mindtree has seen its P/E going below 20 after a long period
  • Tata Elxsi (20x vs 37x) and Persistent system (11.7x vs 18.5x) has seen maximum reduction from the 5 Year avg P/Es.

The longer term charts has been discussed couple of times in previous showing the 2 years cycle that has been active from alternate month of February. Refer to the article previously posted:

The past history for Nifty IT Index has been following a 2 year cycle. This has been followed since Index formed major top in Feb 2007. The follow-up update showed the continuation from the trend-line support zone where IT index witnessed strong rally. The rally persisted for quite a while halting around the peak zone formed bullish pennant pattern. Index thereafter continued further towards completing its 100% of ABC pattern. Corrective move has led price showing pullback towards support levels.

The pullback in this sector has been substantial and almost all stocks are trading at a discount, the market will take cognizance of this and look to accumulate quality names in this decline. We are also in the process of identifying stocks to BUY in our PMS in this decline.

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