After years of stellar performance from frontline IT stocks, investing community has turned back on them en masse in 2007. No one seems to have been spared. The year-to-date (YTD) stock performances of companies such as Infosys Technologies (which is down some 31% from its February high); Wipro (down 28% YTD); TCS (down 22%YTD) and Satyam (down 22% YTD) are testimony to the fact there have been lot of things wrong fundamentally for the sector.

The BSE IT index is down 17% during the last 1 year and IT sector funds’ performance is no different. Franklin’s Infotech Fund is down 18.2% while UTI’s Software Fund is down 12.5%. All this when the benchmark Sensex is up 48% during the last 1 year.

The Genesis

A slowdown in the US economy as a result of consecutive jack-up in interest rates, a regime which began sometime in late 2004 or thereabouts, followed by homebuilding crises which began in mid 2006 (while rates peaked), imminent burst of the housing bubble and later a full blown sub-prime crises in 2007.

Now with the Fed going onto a cruise control mode with interest rate cuts to stoke the economy, the dollar has had to bear the brunt, what with investors taking flight to destinations offering higher rates of return on govt. paper.

So what’s the deal with our IT companies?

For one, our IT companies’ annual revenues largely depend on client based in the US resulting in dollar earnings. Since the rupee has now gained around 15% or thereabouts against the dollar, the IT companies’ revenues are set back around the same percentage. Wage inflation and skilled manpower shortage are added headaches to deal with.

In wake of the current crises of sorts, top tier IT companies have guided investors with softer growth in earnings, revised target manpower additions downwards and revealed various cost cutting initiatives, including softer wage hikes in 2008.

Time to get out, then?

Now that depends, on where you are. We mean we could see broadly three types of investors in these companies

One: who have invested in these stocks years ago, have reaped large dividends in them and continue to hold these stocks now. We believe that investors such as these should take these structural changes in the sector in their stride, possibly invest more at the moment because we believe that the long term story ain’t over yet. Is it a good time to enter now? You might ask. Well, one could wait a few days or months since we see improvement coming over in mid-2008, so we have time on our hands, or so it seems.

Two: these are investors who are waiting to get into this sector since it seems to have become attractive. We would encourage investors in this category to start at these levels and expect decent returns over a medium term (next 1 to 2 years). We believe that there can never have been a good time to enter in IT than this.

We believe that investors get few chances like these over cycles in every sector and should be grabbed by both hands.

Three: now these are guys who have entered IT stocks over the last 12-18 months. TOUGH LUCK. Things like these happen, is all we can say. That is where Gurus have propagated to diversify your holdings. However, all is not lost. Even if we were in such a position, we would continue to invest in the sector, albeit now we are getting more shares with the same amount of money than before. In addition, there is a strong case to introspect and pick those who one believes will have the wherewithal to stand up and run.

Recall the last time your kid fell while walking or running. Did you turn your back on him / her or did you stand up by him so that he / she could stand up again and walk / run.

So does that answer your question, time to get out?

Keep the faith!!


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