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What can spook IT's party in 2010?
Mon, 18 Jan Pre-Open

As we move into the third full week of 2010, the third quarter results of India Inc. are set to intensify. This is after the previous week that belonged to the IT majors Infosys and TCS. Both these companies announced decent numbers for their third quarter. What is more, both the managements talked with greater optimism about the future than they did a quarter or two ago.

There is no denying that the outlook for IT companies has improved over the past few months. Global IT spending is expected to increase by 3.3% during 2010. This is after it saw a 3.6% decline in 2009. IT services spending in particular is expected to grow by 4.5% during this year. This will bode well for the Indian IT industry as well. In fact, the industry regulator Nasscom also sees an uptick in IT demand. It expects the industry to register a double-digit growth during the coming fiscal i.e., FY11.

So all seems to be going well for the sector as of now.

However, the spoke in the wheels for the sector's future performance, as both Infosys' and TCS' managements recently agreed, is currency volatility. With the rupee rising against the US dollar on the back of rising foreign inflows into India, IT companies are sure to take some hit on their margins going forward. And this remains a key risk.

But the way IT stocks are behaving now, it seems investors are again getting comfortable with risk taking. And they seem to be neglecting the rupee's constant rise. A run-up that began last April has brought most frontline stocks at nearly their all-time highs. In fact, P/E multiples of most of these stocks are already at multi-year highs.

We suggest that investors must get somewhat cautious with respect to their exposure to IT stocks. This is especially considering that a lot of good news is already priced into the valuations. Of course, one can still find and invest in a good quality IT company selling at low valuations. But that's become a tough task these days.

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