Nifty IT outperforms Nifty, up 4% in August; what should be your strategy for the IT sector?

Among the index components, shares of Coforge are up over 11 per cent in August, followed by L&T Technology, Persistent Systems and Tech Mahindra, each rising over 7 per cent this month. Shares of LTIMindtree, Infosys and HCL Technologies are up between 4-5 per cent. Index heavyweight TCS is the only stock that is in the red in August, with a loss of one per cent. The Nifty IT index is set to extend its winning streak into the fourth consecutive month.

The improved outlook of the US economy has boosted sentiment for IT stocks. Most experts point out the fresh economic trends in the US which indicated the world’s largest economy is unlikely to see a recession in the near future. Besides, there are expectations that the US Fed will not hike rates from here on as rates are already at their 22-year high level.

Another factor is the emergence of artificial emergence (AI) which experts believe will be an integral part of corporates soon. Experts expect IT companies to see strong demand for AI-related work in the near future.

What should investors do?

Experts are positive about the prospects of the IT sector and suggest buying quality IT stocks for the long term.

“Long-term growth prospects for the IT sector are favourable, but investor enthusiasm has apparently been hampered by the current state of uncertainty in the USA and other major global economies. However, a select group of mid-tier IT firms, such as Coforge, Persistent, L&T Technology, Lti Mindtree, Mphasis, and Tech Mahindra, have significantly outperformed the Nifty IT Index. Future winners will be the businesses that can adapt to the shifting demands of technology and have strong skills in AI and digital,” said Aamar Deo Singh, Head of Advisory at Angel One.

Arpit Jain, Joint MD of Arihant Capital observed despite the potential economic slowdown and uncertainties, strong revenue growth in FY22 and FY23 boosts confidence.

“While caution exists for the North American market due to the short-term outlook, deal acquisitions and automation investments offer hope for recovery within 2 to 3 quarters. Sectors like retail and manufacturing sustain demand, poised for resurgence,” said Jain.

“Emerging tech services such as AI, machine learning, IoT (internet of things), and cloud show stability, ready for recovery post macro hurdles. Momentum for IT firms is anticipated in H2FY24, driven by deals and reduced supply constraints. Companies integrated with automation are set for steady long-term demand,” Jain said.

Jain’s top picks in the sector include TCS, Coforge, Tech Mahindra, Birlasoft Ltd & FSL.

Narender Singh, a smallcase manager and the founder of Growth Investing believes new emerging segments, such as AI, will definitely boost the IT sector across the consumer segments.

“I would remain bullish on the overall IT sector, considering a few fundamental factors like growth projection, adoption of the new emerging technologies in this space and a strong global demand for Indian IT space. Also one has to keep an eye on the emerging companies that are focusing on Artificial Intelligence-based applications which will definitely attract more attention. Caution has to be paid towards the heavy reliance of companies who are heavily dependent on the US & EU clients till those economies steer out of the concerns projected at the global level,” said Singh.

Another smallcase manager Gaurav Verma, who is also the Director of 21G Investment Advisers Pvt Ltd, believes the rise of new technologies, such as artificial intelligence, cloud computing, and the internet of things, is creating new opportunities for the IT sector.

“The IT sector is a significant driver of economic growth and employment in India. It is expected to continue to grow in the coming years, but it will face some challenges along the way. The outlook for the IT sector is positive. The global economy is expected to grow in the coming years, and this will drive demand for IT services. This particular sector has been a laggard till now and we believe if the market stabilizes at current levels, IT will lead,” said Verma.

Verma’s view is a little neutral to positive on the sector. He believes this could be the right time to invest in the IT sector for the next 6-12 months as it could do a catch-up rally.

“Mid-IT is the one that could look really great in the coming times. If the market goes into correction without pause, the IT

sector has pending growth which makes it look strong currently, as other stocks have run up a lot and need to consolidate for the coming months to start the next rally. These stocks are all large, well-established IT companies with a long track record of growth. They are also relatively affordable, making them a good option for long-term investors,” said Verma.

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Disclaimer: The views and recommendations above are those of individual analysts and broking companies, not of Mint. We advise investors to check with certified experts before making any investment decisions.

Updated: 30 Aug 2023, 12:56 PM IST