IT Stocks - Right time to invest? .. Better Stay Away

IT stocks escaped from severe correction due to rupee weakness despite severe impact on their margins and new orders due to global recession.

This sector will underperform in 2009 even if share market recovers in late 2009. There is just 10-30% downside left for stocks in many sectors but there is 30-50% downside left for stocks in IT sectors. Prices of these stocks have still not included all the negatives.

Current global recession will affect IT sector in 2 ways. One is drastic fall in new orders and second is severe squeeze in margins for new orders as companies try for cost reduction. More IT companies will compete for few available orders which result in big fall in margins.

US Auto sector bankruptcy is new headache for IT sector which is already affected due to recession in banking, financial and insurance sectors. Stock markets will never react in slow motion to either positive or negative news. They will react violently in few sessions and it is difficult to time the markets. Just stay away from these stocks.

Worst affected stocks due to US auto sector: KPIT Cummins, TCS and Satyam.

Interesting statistics:

1. IT spending in USA – CIOs Survey:
September, 2008: 1% growth in IT budgets.
December, 2008: 10-20% fall in IT budgets.
Estimation: 30-40% fall in IT spending mainly due to bankruptcies and cost cutting measures.
It has been reported that big IT outsourcers like Best Buy and VISA from USA are seeking 3 - 7 % billing rate cuts from their Indian IT service providers. (Source: Economic Times)

2. Indian IT industry growth – Infosys:
In 2007-08: 30% growth.
In 2008-09: 15% growth.
In 2008-09: ?% growth.

3. Pharma: Global generic sales growth: No one will be spared from this recession.
12 months ended September 2007: 11.4%
12 months ended September 2008: 3.6%.

Why IT people are important for economy:
70% of non-basic consumption in India is due to these IT people or NRIs. When most of India is reeling under poverty, IT people helped to create real estate boom and Mall-Multiplexes culture which led to “India growth story” which in turn helped to attract “hot money” from foreign shores. Funds from NRIs helped to add fuel to the fire. These young people with their huge consumption (Indians are traditionally savers but not spenders) changed the dynamics of the nations over the past 2 years.

Whether they lose jobs or not, if they decrease non-basic consumption, Indian economy will suffer. How many Indians can pay above Rs 2,000 per sqft? If banks will not give loans to these young engineers, Real Estate boom will collapse which will have cascading effects on banks and NPAs thereby on real economy. Real Estate stocks corrected by 80-90% by including all these underlying negative points but Real Estate prices are corrected by just 20-30%.

Verdict: There are still excesses in the system which needs correction. People should not lose jobs. Until these two things will not happen, Stock Markets will not make sustainable rallies. People are still losing jobs while SEBI is still helping “hot money people” just to increase volumes in the exchanges. Wait and watch.

Be cautious for your investments in IT Stocks in 2009. The global recession & economic turmoil in BFSI segment in USA can hit the sector hard in multiple ways.

Also Read: Slowdown in Indian Economy?