Fund houses seem to remain upbeat on the technology sector despite a continued period of underperformance.
Since the beginning of 2022, there have been 12 tech-focused funds launched so far. Of these, two funds — Quant Teck Fund and HDFC Technology Fund — still have their new fund offers (NFOs) open.
Market players say technology stocks are showing signs of a revival in interest after a period of underperformance.
“While the rate hike cycle initiated by central banks dampened sentiment of most growth stocks, impacting their cash flows and valuations, tech stocks had a hard landing in 2022. This came on the back of stupendous returns in 2020 and 2021. With rising interest rates not dramatically impacting economic activity and tech spending as expected, coupled with the pause in the rate cycle, IT stocks are back in favour with the value investors,” says Gopal Kavlireddi, vice-president (research) at FYERS.
At the same time, other sectoral indices like the FMCG, Pharma, Auto, and PSU Bank have significantly outperformed the benchmark.
In recent months, however, the Nifty IT index has delivered just short of 7% returns, outpacing the Nifty50. Analysts tracking the IT sector have said that the worst seems to be behind, with tech stocks offering a good buying opportunity now.
Asset management companies (AMCs) seem to be on the same page, being confident on technology-related ETFs and schemes.
So, what’s behind the renewed optimism?
It is likely that some see it as a contra bet as the Nifty IT has underperformed since the past 1.5 years, and historically, such underperformance has been followed by outperformance.
“When compared to global peers like the Nasdaq 100, the Indian IT sector exhibits better financial strength through higher Return on Equity and higher Return on Assets, while being relatively attractive on valuation parameters like lower P/E and P/BV,” says Anil Ghelani, SVP and head of Passive Investments & Products, DSP MF.
A note by DSP also highlighted that in recent months, there have been inflows into IT sector ETFs and IT Sector Active Funds have also been seeing inflows, some of which have been continuous flows since three years. The note cited data from ETF flows (IT sector), which show that following Rs 2,791 crore of outflows in 2022, there have been inflows of Rs 331 crore in 2023 so far.
In the results season gone by, many mid-cap and small-cap IT names reported numbers in line with or surpassing analyst expectations, with encouraging revenue and profit figures.
As a result, the trend is expected to sustain over the long term, with momentum picking up gradually, say fund managers, adding that the global competitiveness and edge possessed by the Indian IT sector has made it a consistent performer over the longer term.
“Indian IT companies see less variability when it comes to earnings, reducing earnings surprises, and consequently being rewarded with higher earning multiples by investors. The US is among the most important markets, and with the services sector in the country slowing down, there could be continued pressure on revenue growth and margins in the near term,” pointed out Ghelani.
On the other hand, even though certain stocks may still have a downside potential, it is still a good sector — on a broader level — to consider from an investment point of view to bet on a turnaround in the medium-to-long term, he pointed out.