IT stocks bring some cheer

Tue, 9 Feb Closing

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After the weakness the Indian markets have seen for the past few days, it seemed that today would be no different. But that was during the opening hour. As trading progressed, the markets moved up, led by gains in IT, auto, and telecom stocks.

The BSE Sensex and NSE Nifty closed with gains of around 110 points (0.7%) and 25 points (0.6%) respectively. Mid and small cap stocks followed suit. The BSE Midcap and BSE Smallcap indices closed higher by 0.3% and 0.5% respectively. Rupee was trading at 46.65 against the US dollar at the time of writing.

IT stocks were amongst the biggest gainers today. The BSE-IT index gained 2.5%. Heavyweights like Infosys and TCS were in the limelight. This comes after the last few days of weakness that these stocks had seen. Industry experts believe that the worst seems to be over for the Indian IT sector. That is what we can also infer from the performance of the top four IT companies during the quarter ended December 2009. Improving volumes coupled with stable pricing has infused a new confidence in them. Better customer sentiment emanating from previously plagued industries and geographies is also fueling new hopes.

However, when it comes to the stocks of most of the IT companies, valuations do not paint a rosy picture. With a sharp rise in stock prices over the last 9-10 months, most of the stocks from the sector are already factoring this recovery. Additionally, there is a looming concern of currency volatility impacting IT companies' margins going forward.

Realty stocks, led by DLF, HDIL, and Unitech bucked the trend today and closed weak. Stocks from the realty sector have been mired under several issues over the past few months. Prominent amongst them is the subdued demand for commercial and residential real estate. Given the stimulus in the form of restructured loans that these realty companies benefited from last year, they did not lower their property prices expecting the recovery to help them with higher demand for their projects. However, while recovery happened in the broader economy, realty buyers have largely remained on the sidelines owing to prevailing high prices in several pockets of the country (Mumbai being a prime example).

In fact, some experts like Deepak Parekh of HDFC believe that residential property prices have again reached bubble levels. And he has warned that if prices rise further from here on, sales will freeze. But are the realty companies listening?

Auto stocks were in favour today. Key gainers included Bajaj Auto and Hero Honda. However, car manufacturers like Maruti closed in the red. Earlier, a report on the Wall Street Journal suggested that India's car makers have reported their highest ever monthly domestic auto sales during the month of January 2010. The reported sales volumes show an increase of 32% YoY. During the month, these stood at about 145,000 units as reported by the Society of Indian Automobile Manufacturers (SIAM). The previous high stood at about 130,000 units.

Auto stocks have in fact been quite in demand not only today but over the past year or so. While the BSE-Sensex has garnered returns of about 60% since the beginning of last year (January 2009), the BSE-Auto Index has risen by about 170% since then. There are a variety of reasons for the same - lower input costs, cheaper and easier availability of loans, the overall economic recovery, a low base effect, amongst others. However, with the economic stimulus likely to be withdrawn gradually, and an expected rise in interest rates and input costs, there is a big question mark on whether the auto sector will witness a similar kind of trend during the next financial year as well.