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Losing influence? IT sector index weight in Sensex hits five-year low

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Three software companies in Sensex used to account for 17.8% in March 2016

Krishna Kant  |  Mumbai  April 14, 2017 Last Updated at 12:37 IST

The continuing slippage at information technology (IT) companies is making the sector less important in the scheme of things at Dalal Street.


The sector has slipped to third position, behind fast moving consumer goods (FMCG) companies in sectoral weightage on the BSE exchange’s benchmark Sensex, from second most influential sector till a year before. Tata Consultancy Services (TCS), and Wipro, part of the 30-share index, together now have 12.7 per cent weight in the Sensex, sharply down from 17.8 per cent at the end of the March 2016 quarter (see chart).


The sector weight will fall further if Thursday’s stock price is taken into account. IT companies, led by (down four per cent), were among the biggest losers on the day.


Banks and financials continue to lead the charts, with 27.1 per cent weightage in the index, up from 24.5 per cent at the end of the March 2016 quarter.
 

Analysts attribute this to IT companies’ poor performance on the bourses and their lower (price to earnings multiple), compared to other sectors.


IT companies have lost nearly 15 per cent of their market capitalisation on average in the past 12 months, against a 15 per cent rise in the benchmark index during the period. Infosys’ shareholders have been the biggest loser, with the stock down 20.5 per cent in these 12 months. Followed by Wipro, down 15.4 per cent, and TCS, down 7.7 per cent.


A company index weightage is a function of its market capitalisation and the share of non-promoter holding. Only the value of shares owned by non-promoters is taken into account in calculating its index weight. Price movement in a company or a sector with greater weightage has bigger influence on the index movement than one with lower weightage.


The analysis is based on index companies’ market capitalisation and shareholding pattern at the end of March every year, since 2012.

graph


Analysts expect IT companies to lose more ground in the coming weeks, given Infosys’ lower than expected earnings in the March 2017 quarter and poor growth outlook for the sector in the near to medium term. Currently, the sector is closely followed by oil & gas companies and automobile makers in terms of index weightage.


“IT companies are likely to continue to grow slower than domestic market-focused sectors such as automobiles and oil & gas. This will translate into relatively poor stock performance for IT stocks, leading to a further decline in their index weightages,” says G Chokkalingam, chief executive, Equinomics Research & Advisory. The combined net profit of the top IT companies that are part of the Nifty 50 benchmark index on the National Stock Exchange is expected to grow by two per cent on a year-on-year (YoY) basis during the March quarter, according to the average of estimates by six leading brokerages. 


In comparison, the combined net profit of Nifty companies is estimated to grow by 15.6 per cent YoY during the quarter.

graph


Despite this performance, IT companies remain one of the most profitable and cash-rich of sectors among the index companies. The three IT companies that are part of the BSE together accounted for 21.2 per cent of combined net profit of all companies in the past four quarters, behind oil & gas companies (21.7 per cent) but ahead of banks & financials (18.3 per cent) and FMCG (6.3 per cent). This makes IT stocks a value buy for risk-averse investors.

Losing influence? IT sector index weight in Sensex hits five-year low

Three software companies in Sensex used to account for 17.8% in March 2016

The continuing slippage at information technology (IT) companies is making the sector less important in the scheme of things at Dalal Street. The sector has slipped to third position, behind fast moving consumer goods (FMCG) companies in sectoral weightage on the BSE exchange’s benchmark Sensex, from second most influential sector till a year before. Tata Consultancy Services (TCS), Infosys and Wipro, part of the 30-share index, together now have 12.7 per cent weight in the Sensex, sharply down from 17.8 per cent at the end of the March 2016 quarter (see chart).The sector weight will fall further if Thursday’s stock price is taken into account. IT companies, led by Infosys (down four per cent), were among the biggest losers on the day. Banks and financials continue to lead the charts, with 27.1 per cent weightage in the index, up from 24.5 per cent at the end of the March 2016 quarter.Analysts attribute this to IT companies’ poor performance on the bourses and their lower valuation …

The continuing slippage at information technology (IT) companies is making the sector less important in the scheme of things at Dalal Street.


The sector has slipped to third position, behind fast moving consumer goods (FMCG) companies in sectoral weightage on the BSE exchange’s benchmark Sensex, from second most influential sector till a year before. Tata Consultancy Services (TCS), and Wipro, part of the 30-share index, together now have 12.7 per cent weight in the Sensex, sharply down from 17.8 per cent at the end of the March 2016 quarter (see chart).


The sector weight will fall further if Thursday’s stock price is taken into account. IT companies, led by (down four per cent), were among the biggest losers on the day.


Banks and financials continue to lead the charts, with 27.1 per cent weightage in the index, up from 24.5 per cent at the end of the March 2016 quarter.
 

Analysts attribute this to IT companies’ poor performance on the bourses and their lower (price to earnings multiple), compared to other sectors.


IT companies have lost nearly 15 per cent of their market capitalisation on average in the past 12 months, against a 15 per cent rise in the benchmark index during the period. Infosys’ shareholders have been the biggest loser, with the stock down 20.5 per cent in these 12 months. Followed by Wipro, down 15.4 per cent, and TCS, down 7.7 per cent.


A company index weightage is a function of its market capitalisation and the share of non-promoter holding. Only the value of shares owned by non-promoters is taken into account in calculating its index weight. Price movement in a company or a sector with greater weightage has bigger influence on the index movement than one with lower weightage.


The analysis is based on index companies’ market capitalisation and shareholding pattern at the end of March every year, since 2012.

graph


Analysts expect IT companies to lose more ground in the coming weeks, given Infosys’ lower than expected earnings in the March 2017 quarter and poor growth outlook for the sector in the near to medium term. Currently, the sector is closely followed by oil & gas companies and automobile makers in terms of index weightage.


“IT companies are likely to continue to grow slower than domestic market-focused sectors such as automobiles and oil & gas. This will translate into relatively poor stock performance for IT stocks, leading to a further decline in their index weightages,” says G Chokkalingam, chief executive, Equinomics Research & Advisory. The combined net profit of the top IT companies that are part of the Nifty 50 benchmark index on the National Stock Exchange is expected to grow by two per cent on a year-on-year (YoY) basis during the March quarter, according to the average of estimates by six leading brokerages. 


In comparison, the combined net profit of Nifty companies is estimated to grow by 15.6 per cent YoY during the quarter.

graph


Despite this performance, IT companies remain one of the most profitable and cash-rich of sectors among the index companies. The three IT companies that are part of the BSE together accounted for 21.2 per cent of combined net profit of all companies in the past four quarters, behind oil & gas companies (21.7 per cent) but ahead of banks & financials (18.3 per cent) and FMCG (6.3 per cent). This makes IT stocks a value buy for risk-averse investors.

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Krishna Kant

Business Standard

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