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When everyone sells, you buy: This insurer is busy lapping up IT stocks

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 second-worst performer among 13 industry gauges compiled by BSE Ltd., weighed down by losses in names including InfosysBSE 0.06 % Ltd. and Tech Mahindra LtdBSE 0.22 %. In contrast, India’s benchmark index has surged to a record.

“We prefer software stock 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 500 billion rupees ($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 U.S. 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 (India) Ltd. 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 Ltd.BSE -0.54 %, the top exporters, kick off the earnings , representing a 20 per cent discount to the Sensex, the cheapest in eight years, data compiled by Bloomberg show.

Above-average valuations for the broader Indian market isn’t deterring Bajaj Allianz’s Reddy from adding to his holdings. “If earnings start growing at 15 to 20 per cent, we can see these valuations sustaining and investors would continue to make money even from current levels,” he said.

Reddy forecasts earnings at NSE Nifty 50 companies to rise as much as 18 per cent in the year ending March 2018. The Pune-based fund manager believes his estimates will be achieved, saying that problems that hurt profits in the past three years such as bad bank loans and a downturn in the commodity cycle have peaked.

In addition to software, Reddy is bullish on private banks, other financial services and metal companies. Large-cap stocks offer better “risk-reward” versus mid-sized peers, whose rich valuations are “a challenge,” he said. The S&P BS E MidCap Index trades at 19.5 times its estimated 12-month earnings, a two-year high.

“We are sticking to good, quality companies and we don’t mind paying little higher valuation than the normal range for them,” he said.