1. What is the reason behind the uptrend?
Current up move is due to temporary sector rotation. Investors are switching out of banks and reinvesting in technology. Technology sector has underperformed by 25-30% in CY22 while banking has outperformed and hence the rotation.
2. The IT sector was supposed to be under pressure because of the likely spending cuts. Has anything changed?
IT sector demand is dependent on the economic conditions in the US and EU markets. We expect some moderation in technology budgets in CY23 and not a sharp pullback. Current rally in India IT is also partly driven by the relief seen in Nasdaq in view of the possibility of soft landing in the US and the peak of Fed rate hike behind us.
3. What is your view on the prospects of the IT sector?
Due to issues with inflation in the US and EU markets, the global macroeconomic environment continues to be unclear. In 2024, this might have an effect on the big corporations’ technological budgets. However, we think that this effect would probably only last a short time and would become apparent in 1HFY24.
We think that the current technological upgrading cycle is underway. After Covid, this trip gained tremendous speed. It started slowly in 2018. The upgrade cycle normally lasts 4-5 years, therefore from a medium term viewpoint (2-4 years), the growth runway should be stronger than it was before COVID.
The core components of the growth theme would be automation, big data analytics, and the cloud. Only 30% of businesses worldwide have made the switch to the cloud as of today, but what’s more significant is that many of the clients who have already made the switch are still in the very early stages of adoption. Thus, cloud migration and cloud penetration would continue to be significant growth drivers over the next few years.
Since 2015, Indian IT companies have quickly modernised themselves for the new digital era. They are in fact leading this global technological transition, and their business models are largely resilient to upheaval.
The difficulty is that growth will be somewhat moderated over the coming quarters, but on the plus side, we should see pressure on margins progressively slack off, which will help operating margins. The recent quarters have been extremely difficult due to the increase in delivery prices. Future increases in the proportion of junior personnel, increased outsourcing, better utilisation, salary rationalisation, price increases, and INR devaluation are all potential levers for increasing margins.
In terms of cost competitiveness, when it comes to customer delivery, Indian businesses continue to enjoy a competitive advantage globally. Therefore, we think these businesses will keep expanding their market share in the global market for technology services. This is our medium to long term view on the sector
4. ICICI Prudential Technology Fund has posted 8.07% in past one month. Over 3 and 5 years, the fund has been the topper in the category. What is your strategy?
Invest in high quality, high dividend, strong balance sheet and relative market share gainers and players. We place high reliance on corporates with equal focus on growth as well turnaround stories
5. What is your advice for investors who have investments in the IT sector or technology funds? Should they temper their expectations?
Given that post-Covid returns from the Tech sector till end of 2022 have been very high, investors need to temper their expectations accordingly and remain invested from a 2-4 year perspective. Investing systematically through SIPs over this course may prove to be fruitful.
6. What is your advice to new entrants to these schemes?
It is a good time to enter into the IT sector from a 2-4 year perspective. The sector could remain volatile in the near term and it is advisable to invest through SIPs and do a lump sum if one sees decent correction in the sector.
