Five reasons why you should stay away from IT stocks

IT stocks have fallen over 12 per cent in the last three months since April against a 2.5 per cent gain in the broader Sensex. These stocks have declined despite a sharp fall in the Indian rupee, which hit a record low last week. IT stocks were down for a second straight day on Tuesday with Infosys leading the declines among frontline names.

1. Rupee weakness may not lead to windfall gains: Most big IT firms are hedged for sharp fluctuations in the currency. According to a report by Goldman Sachs, Infosys has a hedge position of nearly 14 per cent of its FY14 estimated dollar revenues, while Tata Consultancy Services has a hedge position for 25 per cent of its FY14E dollar revenues. Moreover, many companies are likely to pass some of the benefits from rupee depreciation to clients at a time when global growth remains sluggish.
2. Earnings related volatility: Infosys will report its first quarter results on July 12. Historically, Infosys shares have swung sharply on earnings announcement. Such wild moves can severely damage portfolios. Infosys shares have fallen over 3 per cent in the last two days with global investment bank Morgan Stanley saying India's second biggest outsourcer may cut its FY14 sales forecast to 4-6 per cent from 6-10 per cent.
3. The U.S. Immigration Bill: Last week, the Senate passed the Immigration Bill, which has damaging provisions for Indian IT. These provisions have the potential to flatten sector earnings over FY13-16F or take them to negative territory, according to global brokerage Nomura. The Bill will now go to the House of Representatives.
4. Accenture's disappointing numbers: Accenture not only missed its revenue guidance in the third quarter, it also cut its full year revenue and earnings per share (EPS) guidance. Clients are pulling back in consulting while outsourcing growth is moderating, both of which have negative implications for the Indian IT stocks, Ashwin Mehta and Pinku Pappan of Nomura said in a report last week.
5. Discretionary spend to remain muted: Accenture's weak consulting growth indicates that there is still no improvement in the discretionary spending environment, Nomura says. Infosys, which earns a third of its revenue from products, consulting and system integration may also continue to lag behind its peers.

 Source: http://to.ly/mdfA