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Something about the technology sector is bothering the market. Even as analyst after analyst recommends the sector, citing strong growth visibility and absence of interest rate sensitivity, tech stocks just will not move. Instead of outperforming in such an environment, the sector has actually under-performed on the sensex this year, with bellweather Infosys leading this underperformance. Why is the market not convinced?

The most apparent explanation would be the rupee - which has appreciated 3 per cent since the start of the year. This, of course, is not good news for tech stocks as it erodes margins. Then there is the issue of the Minimum Alternative Tax (MAT), but this is not likely to be such a swing factor. The fineprint on Fringe Benefit Tax (FBT) on employee stock options (ESOPs) is still not out, so it is difficult to quantify - but somehow this does not seem to be the reason for the underperformance. Is the market then worried about growth? Stock price movements indicate a certain unease before Infosys delivers its guidance for the fiscal year 2008 (FY08). These fears may be unfounded but it seems the market is worried that, after a scorching FY07, Infosys may temper growth expectations in FY08. The genesis of these apprehensions may lie in the faltering US economy, though past soft patches in the US do not substantiate any inverse correlation with growth for tech companies.

Investors seem more comfortable buying into stable midcap tech stocks. Stocks like NIIT Tech, Polaris, Rolta have been big outperformers this year and still trade at price earnings mutliples of about 12. In contrast, frontline stocks like Infosys, TCS and Wipro trade at around 22 times FY08 earnings. Not terribly expensive if they can grow at 35 per cent, but not cheap, if they cannot.
The market seems reluctant to pay richer valuations for frontline companies till it is sure about strong growth visibility. The confirmation of that will have to come from Infosys, which will speak this time on Friday the 13th. Are you superstitious?