The Indian market has been under strong pressure in February owing to concerns including the Russia-Ukraine tussle, impending rate hikes, and inflation.
The market has been witnessing occasional gains but has been failing to stage a breakout from the bearish territory.
Amid the volatility and near-term hazy outlook of the market, analysts are advising investors to buy in sectors such as IT that will gain owing to its growth prospects.
“Information technology (IT) sector is offering a great entry point to earn a superior risk-adjusted return to a patient investor with a view to holding quality stocks for next couple of years,” said Devarsh Vakil, Deputy Head of Retail Research, HDFC Securities.
In February, Nifty has shed about 4 percent while Nifty IT has fallen slightly more than 3 percent. At this point, analysts think the IT pack has some valuation comfort now and investors can look at quality stocks from the fold to add to their portfolio.
The fundamentals of the sector are looking poised for growth. The IT sector has been consistently performing well with continuous positive momentum in the sector. The main reason behind the positive momentum and healthy revenue growth are Strong order bookings, broad-based revenue growth and stable margins. The second reason for the healthy revenue growth for the Indian IT sector is the minimal impact of COVID-19 on the sector.
Harsh Patidar, Senior Research Analyst at CapitalVia Global Research highlighted that other than the above factors, this being a seasonally strong quarter, coupled with acceleration in digital technologies and improved deal pipeline are further expected to have driven IT companies and revenues.
Patidar believes in the further growth of the IT sector, due to Covid a lot of companies’ revenues declined and force them to transfer jobs to developing countries where the charges are low. This has benefited the company and hence helped them expand their customer base and increase the revenue.
“This pattern is likely to continue in the coming times as well as it has benefited the company around the globe to get their work done efficiently at a lower price. We expect that shares like TCS, Infosys should be bought on dips as the situation gets better around the geopolitical tensions,” said Patidar.
The IT sector has been witnessing a strong demand scenario in the wake of Covid-19 which saw increased dependence on technology in the IT sector.
“Currently, a huge workforce is undergoing training in the IT sector which would progressively contribute to numbers and current high attrition is a lead indicator of an extremely strong demand environment,” Vakil pointed out.
“Higher cloud adoption across industries, verticals and geographies will lead to a substantial jump in tech capex led by BFSI’s renewed propensity to spend and spurred by fintech players’ hyperactivity. A sharp bounce-back in manufacturing and product engineering services offers revenue visibility.”
Sumit Pokharna, VP, Fundamental Research at Kotak Securities, highlighted that IT sectors are likely to gain on the digital transformation by BFS (banking and financial services) firms. Companies are committed to accelerated cloud migration and digital transformation journey.
"Increased online penetration of banking products and services is a key catalyst. Increased competition from well-funded cloud-native fintech and from big tech companies is another key catalyst. Commentary of large US banks indicates strong willingness to keep investing in technology initiatives. Outlook is positive and indicates an increase in tech budgets in 2022," said Pokharna.
Pokharna added that investments are broad-based and across sub-verticals, leaders and laggards, medium and large-sized firms and across the tech stack. The shift from cash to online transactions is fueling opportunities for payments and cards firms which they intend to capture by investing in technology.
"Investing in data management, analytics and automation is a foundational area for banks and TCS and Infosys will be at the forefront of capturing this demand among Indian tier-1 IT companies. LTI and Mphasis have strong credentials and will benefit," said Pokharna.