Should investors look at buying into technology stocks? | Outlook Business
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Should investors look at buying into technology stocks?
The BSE IT index has gained 3% since the August sell-off, as against a 10% drop in the benchmark Sensex

Sudip Bandopadhyay, MD and CEO, Destimoney Securities and UR Bhat, MD, Dalton Capital Advisors discuss technology stocks

Sudip Bandopadhyay, managing director and CEO, Destimoney Securities

I continue to be bullish on IT stocks predominantly on two counts. First, rupee depreciation directly adds to the bottom-line. And as things stand, the currency is expected to weaken further when the US Fed hikes rates. Importantly, top-tier IT companies continue to earn more than 50% of their revenue in dollars. Second, although one can argue over the extent of recovery, there is no denying that the US economy is looking much better. That acts a big boost, given that the US remains the biggest market to date for IT firms. Also, domestic IT companies are looking at new emerging opportunities. Though they may not be at the forefront of the digital revolution, they will be able to monetise some part of the digital initiative. As a result, over time, the sector should see a 10-13% CAGR. Though not impressive, this is a good growth to have in the kind of volatile phase that the economy is in.

UR Bhat, managing director, Dalton Capital Advisors 

The big IT players are at a crossroads: there is only so much that they can do in terms of their service offerings and growth in the future is likely to be in single digits. However, their valuations seem to reflect growth coming in at a much faster rate. They can achieve that either through carefully crafted acquisitions or through innovation. So, while the environment appears conducive for IT firms amid the rupee depreciation and an improving US economy, if some of these are unable to innovate, they could see significant value erosion. Based on the levels at which these companies are currently valued, that supposition can either be proved right or wrong. If the firms are unable to innovate and go to the next level in terms of offerings, that assumption of change in pace of earnings might not be valid. In other words, valuation premiums could be in for a serious correction. 

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