Are Indian IT Shares Overpriced?
Indian IT companies have been working nearly nonstop for a decade, turning India’s cost advantages and technical expertise into booming revenue and profit growth. Although their stock prices collapsed during the downturn, they’ve zoomed higher with the recovery in developed markets. Since their 2008 troughs, the stocks are up by as much as 300%. Major players Infosys Technologies and Wipro sport market values of $33 billion each.
Now, probably it could be time for the shares to take a respite.
Valuations of the stocks far exceed the companies’ growth rates, and include a premium to the Indian market, which itself carries a historically high price/earnings ratio of 25 – even though India is expected to tighten credit. Wipro trades at 34 times earnings, versus a long-term growth rate of 16%. Tata Consultancy Services (TCS) trades at 22 times. Infosys’ multiple of 26 is nearly twice its long-term growth rate of 14. Yes, these stocks have often traded at lofty valuations, but now the risks are rising, too. If Infosys, for example, traded at its average P/E of 20 over the last 12 months, the stock would fall by 25%.
Risks in Indian IT Stocks
The companies are reaching historical highs and have recovered very nicely. There is too much expectation. The next level is Neutral – a trigger for a sale.
Other risks include U.S. protectionism, economic uncertainty and possible order delays caused by the U.S.’s proposed Volcker financial reforms (banks and financial institutions make up nearly a quarter of global IT spending), and a potential reversal in the resurgent dollar, which could hurt results.
A host of regional rivals want a slice of the business, including the Philippines and China.
Increased competition has rivals cutting prices on so-called applications development, or custom-software writing.
What you think about this? Is it right time to exit IT stocks??
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