Unloved Indian software stocks a buy for this insurer

The recent underperformance 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 secondworst performer among 13 industry gauges compiled by BSE, weighed down by losses in names including Infosys and Tech Mahindra. 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 Sampath Reddy, chief investment officer at Bajaj Allianz, which manages $7.7 billion of assets. The Bajaj Allianz ULIP Equity Growth Fund, the largest managed by Reddy, has returned 19 per cent so far in 2017. Shares of Indian technology companies 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 Prasanth Prabhakaran, chief executive officer at Mumbai-based Yes Securities . Companies able to adapt more quickly to changes in the operating environment will be “good buys.”

The BSE IT Index has climbed 3.9 per cent so far this week, set for the steepest gain in that period in more than seven months. The gauge has fallen 16 per cent from its peak in March 2015. Infosys and Tata Consultancy Services, the top exporters, kick off the earnings season for the April-June period this week.

Bajaj Allianz’s 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 per cent, and even though the growth has slowed the potential for 5-10 percent growth is intact,” he said.

The software gauge is valued at 15.6 times forward earnings, representing a 20 per cent discount to the Sensex, the cheapest in eight years, data compiled by Bloomberg.