The shares of Indian IT firms have been rallying in the past due to the anticipation of blockbuster earnings. During this uncertain time, when companies are finding it difficult to sustain their revenues, the IT sector has impressed investors with its double-digit growth.
Pranjal Kamra, CEO of Finology, says, “A big shift is happening in this industry where the inflow of demand from the clients due to the pandemic is firming up the earnings of companies like TCS, HCL, Infosys, Wipro, and MindTree.”
The pandemic has accelerated the adoption of digital and cloud technologies. Experts believe this trend is likely to continue over the next five years. Chintan Haria, Head- Product Development & Strategy at ICICI Prudential AMC, says, “Growth rate is likely to be better than pre-covid growth levels. Also, global IT budgets of corporates are increasing which is a leading indicator of growth for Indian IT companies.”
Technological innovations are taking place at a break-neck speed, a theme that experts say is going to continue over the coming years as companies look to solve the problems we face. Viraj Nanda, CEO, Globalise, says, “Investing in technology companies helps investors participate in the growth that comes as a result of the innovation, which has been driving the recent popularity in these stocks.”
Should one be investing in the sector?
Diversification is an important part of constructing a robust portfolio, and experts say it is important that investors diversify across sectors and geographies. Digital technology adoption is becoming pervasive in almost every sector. Industry experts say earning visibility of the IT sector over the next two to three years is going to get even stronger.
Kamra, of Finology, says, “Earlier the major cost used to be the attrition rate of employees where IT companies had to keep increasing their employee’s salary month after month but such is not the case anymore. Tech stocks are a good investment option for both growth and income investors who can choose from several mature and established companies.”
Disruptive technologies such as cloud computing and data analytics are offering new windows of opportunities for Indian companies. As a result, experts say the IT sector is likely to be on a growth path from a near to medium term perspective as technology spends would continue to gain share for every corporate.
Kamra, further adds, “It is a rapidly developing sector and a lot of growth opportunity lies even in these mature companies. IT stocks frequently spot higher premiums than other market category and it is due to above-average growth rates that these companies post. An investor should certainly look for the long-term contracts that these companies hold along with the average revenue earned per employee by the company.”
Who should invest in the sector?
Investors who are participating in the Indian equity markets, either through single stocks or mutual funds, experts say should think about allocating a portion of their portfolio towards global markets to build a well-diversified portfolio. As part of this, one could consider taking exposure to technology stocks through a variety of routes available, depending on one’s risk appetite.
Nanda, of Globalise, adds “Investors can buy individual stocks of companies like Tesla, Apple, Netflix, Google, etc. Ownership can be in the form of full or fractional shares, enabling investors to own a share in the profits of these tech giants.”
Additionally, Nanda says, “for those investors who want a broader exposure to a diversified set of technology companies, the best route is through exchange-traded funds (ETFs). Here, funds like the Invesco QQQ Trust ETF (Ticker: QQQ) track the Nasdaq 100 index and includes the largest 100 U.S and international companies listed on the NASDAQ exchange. Several thematic ETFs provide exposure to specific themes in the technology space – for example, the First Trust Cloud Computing ETF (SKYY) invests in companies involved in the cloud computing industry.”
Experts say investors with a long-term view of the market should be cognizant of the market’s cyclical nature and focus on things that are within their control. Haria, of ICICI Prudential AMC, says “Investors who have an investment horizon of at least three years should invest in the sector. This is because digital as a theme is likely to fuel growth in the near term which is a positive for the sector.”
Note that timing the market is extremely difficult – experts say long-term success has been achieved by investors who follow a strategy consistently and invest with a long-term view of the market. Therefore, investors should have a positive view of the innovation taking place, and those who want to build exposure to these companies to participate in their growth should continue doing so in a systematic manner.