The rupee appreciation since April 2007 has not discouraged foreign institutional investors from increasing their exposure in front-line information technology stocks.
They have increased their holdings in Infosys Technologies, TCS and Wipro between two and four per cent, going by the shareholding data for the quarter ended December 31, 2007.
The FIIs' stake in Infosys Technologies, for instance, moved up from 32.55 per cent in March 2007 to 32.78 per cent in September 2007 and 33.25 per cent in December 2007.
They added 28.04 lakh shares since March last year as the stock dropped by 38.8 per cent from its high of Rs 2,439.
TCS, the country's largest software services company, has been on the FII radar despite the stock having lost 31.6 per cent from its 52-week high of Rs 1,350.
The FIIs added 24.94 million shares to their portfolio since March 2007. As a result, their stake in TCS increased from 7.06 per cent in March 2007 to 10.65 per cent as on December 31, 2007.
The stock price of Wipro too declined in line with its peers down 33.3 per cent from its 52-week high of Rs 690.
Undeterred, FIIs bought 12.41 million shares of Wipro in the last nine months, increasing their exposure from 5.14 per cent to 6.04 per cent.
The major reason behind the stake hike by FIIs has been cheap valuations of front-line IT stocks, in terms of price to earning multiples (P/E).
Though the 30-scrip Sensex is trading at P/E of over 26 based on trailing twelve months earnings, Infosys Technologies and TCS are available at a P/E of over 18 times.
Wipro, which will announce its third quarter result tomorrow, is trading at a P/E of over 21.31 times.
Analysts expect the forward earnings of these stocks to be much below their earnings potential going forward.
Infosys Technologies has been trading at P/E of 17.5 times; TCS trading at 16.4 times and Wipro is trading at 17.4 times estimated FY 2008-09 earnings.
There is buying in IT stocks as the North American financial services' spend is expected to grow at the rate of 4.1 per cent year on year, inspite of a slowdown in 2008. The IT spending by European financial services should remain strong at 5.7 per cent.
Accenture said that it has not been impacted by the changes in IT budgets so far. "70 per cent of US companies in the business round table expect pretty significant increases in sales and almost 80 per cent expect their employment to rise", it reported.