Unloved software stocks a buy for Bajaj Allianz after steep drop
13th Jul, 2017
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The recent under performance of Indian software stocks, once considered a bellwether of the overall market, is a glaring buy signal for Bajaj Allianz Life Insurance Co. The S&P BSE Information Technology Index is the second-worst performer among 13 industry gauges compiled by BSE Ltd, weighed down by losses in names including Infosys Ltd and Tech Mahindra Ltd. In contrast, India’s benchmark index has surged to a record. “We prefer software stocks among defensive sectors such as pharmaceuticals and IT, as they have entered a ‘buy zone’ in terms of valuations after the recent correction,” said Sam- path Reddy, chief investment officer at Bajaj Allianz, which manages Rs500 billion of assets. The Bajaj Allianz ULIP Equity Growth Fund, the largest managed by Reddy, has returned 19% so far in 2017. Shares of Indian tech firms have been hurt by uncertainty about US visas amid rising protectionist rhetoric that has forced some clients to delay decisions on outsourcing contracts. Investors have also been concerned about recent reports that founders at two of the top four providers were looking to sell their stakes. Some market participants advise waiting for a clearer trend to emerge in the sector.
“Investors must wait six- nine months for a decision on software exporters,” said Pras- anth Prabhakaran, chief executive officerat Mumbai-based Yes Securities (India) Ltd. Companies able to adapt more quickly to changes in the operating environment will be “good buys”. The BSE IT Index has climbed 3.9% so far this week, set for the steepest gain in that period in more than seven months. The gauge has fallen 16% from its peak in March 2015. Infosys and Tata Consultancy Services Ltd, the top exporters, kick off the earnings season for the April-June period this week. Reddy recommends investing in the sector now, and sees profitability being maintained amid continued sales expansion. “Return on capital employed on core business for these companies is still healthy and upwards of 25%, and even though the growth has slowed the potential for5-10% growth is intact,” he said in an interview on Monday. The software gauge is valued at 15.6 times forward earnings, representing a 20% discount to the Sensex, the cheapest in eight years, data compiled by Bloomberg show. Above-average valuations for the broader Indian market isn’t deterring Bajaj Allianz’s Reddy from adding to his holdings. “If earnings start growing at 15-20%, we can see these valuations sustaining and investors would continue to make money even from current levels,” he said.
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