After years of outperformance, the Indian stock market, the blue-chip sector of the Information Technology (IT) sector, has taken a beating in the past few months.
Tech Mutual Fund Has been a star performer over the last 10 years, beating all other categories in Equity, Debt and Commodity. However, tech funds have been the worst underperformers in the last three months.
Tech funds delivered 22% annualized returns on a 10-year basis, while they are down more than 10% on a three-month basis, according to data available with ValueResearch, an investment research provider.
Till August last year, tech funds were showing average returns of around 90% on a yearly basis, but the picture changed this year due to rising interest rate scenario and flight of investors from risky assets amid Ukraine-Russia war.
IT chief on Monday Infosys Ltd tumbled more than 7% after March quarter earnings disappointed the Street. Its larger peer TCS Ltd also fell 3.6%.
According to brokerage CLSA, Infosys’ dream run came to a halt in Q4 FY22 as client-specific conditions impacted revenue momentum, and thus margins. CLSA said, “While demand tailwinds should bring revenue growth back on track soon – 13-15% constant currency (CC) annual revenue growth guidance for FY23 was ahead of expectations – margin recovery may take time, CLSA said. a report.
On the overall tech industry, brokerages are somewhat muted.
ICICI Securities Ltd in a recent report had said that Nifty IT index may now start underperforming Nifty 50 index due to slower revenue growth, margin headwinds, consensus expectations and valuations and weak macro environment.
“Higher inflation will lead to a postponement of discretionary spending, and increased focus on cost optimization. A higher focus on cost will reduce technical budgeting and reduce discretionary spending.”
Even tech research and consulting firm Gartner Inc. lowered its forecast for IT spending, saying it will grow at 4% in calendar year 2022 against 5.1% last year.
Nirmal Bang Equities Private Limited has turned a little bearish on the technical sector. “We are downgrading the Indian IT services sector to ‘underweight’ on a 12-month basis, although in the near term, there is relative earnings resilience against some domestic sectors … toughened there by the accelerated normalization of monetary policy in the US.” Landing probabilities increase. And as a result there is less chance of a positive surprise on the fundamental side in the next 12-24 months.”
However, some experts see opportunities in the IT sector after the recent slowdown.
According to Prashant Joshi, co-founder of Wealth advisory firm, Fintrust Advisors LLP, returns with significant rupee depreciation over the past one year are making IT firms attractive.
“IT companies have started declaring their results and their earnings estimates are expected to improve with this falling rupee. IT appears to be an attractive bet for investors, as the rupee’s depreciation is not a one-time event. The rupee is seeing a depreciation of about 4% every year. So IT would be a good bet from a long-term perspective as well.”
Harshad Chetanwala, a SEBI-registered investment advisor and co-founder of MyWealthGrowth, believes the IT sector remains a good long-term bet.
“The recent poor performance could be a good opportunity to add. However, investors may see some more pain down the line. So, if one wants to increase the allocation to technical funds at this juncture, one can go with a gradual approach,” Chetanwala said.
Investors should note that sectoral funds are riskier than broad-based large-cap funds as they lack diversification. Hence, investors may have to hold these funds for a longer period to reap the benefits.
While sectoral funds can deliver higher returns, they are also susceptible to equally large drawdowns. Financial advisors also suggest investing 10-15% of the overall equity portfolio in sectoral funds.