Nifty IT vs Nifty Auto: Which sector has better long-term growth opportunities?

With markets hovering near their all-time highs, many sectoral indices have touched their peaks driven by improving macros, hopes of a rate cut in the near future, healthy recovery in demand, and positive global trends. Among them, let's look at Nifty IT and Nifty Auto.

While Nifty Auto touched its peak of 14,903 in intra-day deals on Thursday, June 8, 2023; Nifty IT is still over 9 percent away from its all-time high.

Stock market trends and earnings suggest that Nifty Auto has started recovering, however, Nifty IT is still likely to face some headwinds in the near term but its growth opportunities remain intact. Let's analyse which of these two sectors has a better opportunity for investors in the long term.

Looking at 2023 YTD, Nifty Auto is the better-performing index. The index has surged over 16 percent in 2023 YTD as against a 3 percent rise in benchmark Nifty and a flat Nifty IT (up 0.1 percent) in this period.

Nifty Auto has given positive returns in 4 of the 6 months in the calendar year 2023 so far while Nifty IT has given positive returns in just 2.

Nifty Auto has jumped 3.5 percent in June so far after an over 7.5 percent rise in April and May each. However, it fell around 4 percent each in March and Feb. Meanwhile, in Jan, it was up 5.6 percent.

On the other hand, Nifty IT has shed 2.5 percent in June so far after a 5.8 percent gain in May. However, it fell around 3 percent both in March and April and was also down 0.3 percent in Feb. In Jan, it added 3.9 percent.

Meanwhile, in the last one year, Nifty IT is one of the very few sectors in the red, down 1.5 percent while Nifty Auto has advanced over 30 percent, outperforming the benchmarks. In comparison, the benchmark Nifty gained 14 percent in this period.

In the long term as well, Nifty Auto has given better returns between the two. Nifty Auto has rallied 122 percent in the last 3 years while Nifty IT is up 92 percent and Nifty has advanced 83 percent.

However, in the last 5 years, Nifty IT has emerged as the winner, surging 102 percent as against a 33 percent jump in Nifty Auto.

Constituents

In the Nifty Auto, among 15 constituents, 14 are in the green in 2023 YTD while only 1 is in the red, whereas among the 10 constituents in the Nifty IT index, 7 are positive while 3 are negative in this time.

Tata Motors has gained the most in the auto index, up over 44 percent this year so far, followed by Bajaj Auto, Sona BLW, and TVS Motor, up over 20 percent each. Meanwhile, Maruti Suzuki, Eicher Motors, and M&M also added over 10 percent in this time.

Bharat Forge was the only loser in the auto space, down 7.

On the other hand, Persistent Systems was the top performer in Nifty IT, up over 27 percent, followed by Coforge and LTIMindtree, up over 10 percent each.

Meanwhile, Infosys was the top loser, down 15 percent, followed by Mphasis, down over 5 percent and TCS, down 0.6 percent.

Looking at the last 1 year, only 2 stocks in the Nifty Auto index were in the red - Sona BLW and Motherson Sumi, down 10.6 percent and 2.3 percent, respectively. Meanwhile, TI India was the top gainer, up 88 percent in 1 year, followed by TVS Motor, up 73 percent.

In Nifty IT, 50 percent of the stocks i.e. 5 stocks - Mphasis, Wipro, Infosys, TCS, and Tech Mahindra - gave negative returns in the last 1 year. Persistent Systems was the top performer, up 37 percent, followed by Coforge, up 23 percent.

Which sectoral index has better long-term growth opportunities?

Suman Bannerjee, CIO, Hedonova, believes Nifty IT has better long-term growth opportunities.

"The Nifty IT index will provide better returns. Historically, the Nifty IT index has shown strong performance compared to the Nifty Auto index due to the growth and increasing significance of the IT sector in India. The IT sector has benefited from global outsourcing trends, digital transformation, and increased technology adoption. IT is one such sector that will be relevant and evergreen in the long term. The auto industry is known for its cyclical nature. It is highly sensitive to economic conditions and tends to experience fluctuations in demand. During economic downturns, consumer spending on big-ticket items like automobiles typically declines, which can negatively impact the sector," the expert explained.

Sunil Damania, Chief Investment Officer, MarketsMojo, also prefers Nifty IT over Nifty Auto. Our recommendation would be to invest in high-quality IT companies, as the risk-reward ratio leans in favor of rewarding outcomes, he said.

Damania pointed out that the Nifty Auto index has demonstrated remarkable performance among sectoral indices in 2023, as numerous auto companies have reported substantial growth in vehicle sales. He further stated that the quarterly financial results for the auto and auto ancillaries sector in March 2023 displayed a YoY growth of 11 percent in volume and an impressive 29 percent growth in net profit. However, looking ahead, the auto sector may encounter certain challenges, he warned. The growth of passenger vehicles (PV) is projected to be around 5-6 percent, and the uncertainty caused by El Nino could potentially impact the demand for auto products. Consequently, achieving continued success for auto companies at this level appears to be challenging, stated the expert.

On the other hand, Damania highlighted that the IT sector has faced considerable uncertainty as the US budget has scaled down its focus on technology. Consequently, the performance of the IT sector in 2023 has been relatively subdued. Nevertheless, he believes that the negative factors have already been factored into the valuations, suggesting a higher potential for the IT sector to deliver greater returns compared to the auto sector.

VK Vijayakukar, Chief Investment Strategist at Geojit Financial Services, as well, has picked the IT space.

"Nifty IT is down 4.5 percent in the last 6 months while Nifty auto is up 14.5 percent during the same period. This trend is likely to continue in the short-term since the IT sector is facing many challenges and autos have made a strong comeback after 5 years of tepid performance. However, from a 3 -year perspective, IT, particularly large-cap IT, may do better since valuations are now at low levels. A pick-up in global growth and IT spending in 2024 will lead to a rerating of IT stocks. It is important to understand the fact the mid-and small-cap IT is doing well even now when the IT index is performing poorly," he explained.

Nirav Karkera, Head of Research at Fisdom, believes that Nifty Auto would be a better bet for the medium term but IT for those with a longer horizon. Both are distinct plays with great upside potential and different levers, he said.

On IT, Karkera said, "Over recent years, listed Indian IT companies have felt the strain, largely due to dwindling global technology budgets and economic slowdown. Since the past couple of years, especially pre-pandemic, the sector's valuations have grown progressively richer, fueled by a promise of sustained growth in earnings. However, the recent correction in valuations offers high-quality stocks at more reasonable prices. As we anticipate a global economic recovery, IT stock prices could continue to consolidate in the short term, potentially breaking out upwards in the medium term. The current climate, therefore, might provide an opportune moment for long-term investors to accumulate top-tier stocks at advantageous prices, preparing for future growth."

For auto, he noted that the sector has been faring reasonably well, sustaining a positive trajectory initiated after the pandemic-induced crash. The momentum has been stronger, directing the index towards higher highs since the beginning of FY23. Along with the fact that a potential interest rate reversal could boost demand, the sector's growth remains also closely tied to the health of the domestic economy and relies heavily on sustained demand and lower input costs, he added.

"Comparatively, IT and automobile investments offer distinct opportunities. The IT sector stands to benefit from the global economic recovery, increasing demand, and cost efficiencies, while the automobile sector is a play on domestic economic prosperity, relying on the growing demand for passenger and commercial vehicles, particularly from rural areas, and lower input costs. Long-term investors would do well to judiciously select their exposure across the value chain within these sectors," he explained.

CONTRARIAN VIEW

Vinay Rajani, CMT, Senior Technical and Derivative Analyst, HDFC Securities, has picked auto between the two.

"Considering all technical parameters, I believe Auto is the sector to be in for the long term as compared to IT. However, looking at the steep rise that the index has registered recently, it would be advisable to adopt accumulate on dips strategy," he said.

The expert noted that since we are taking a long-term view, the index which has been outperforming for the last many months should continue to outperform. Nifty Auto index has been hitting new all-time highs recently. From March 2023, auto index has risen more than 25 percent. Moreover, in the month of May 2023, Nifty Auto index broke out from the long-term consolidation, which held for the previous 10 months. On the other side, the Nifty IT index has been a relative underperformer, as IT Index is up only 4 percent from March 2023 bottom. Earnings and guidance of the large-cap IT companies in the recent quarter were not that upbeat. Indian IT sector is heavily dependent on export-oriented revenues from foreign countries and any negative development there could directly impact domestic IT companies, explained Rajani. He further added that the Dollar index could fall gradually in the long term, which could also impact the domestic IT sector negatively.

Pravesh Gour, Senior Technical Analyst, Swastika Investmart, prefers the Nifty Auto index despite strong outperformance, however, one can wait for correction for fresh entry, he said. He has provided technical reasoning for the same.

The expert noted that the Nifty Auto index has already witnessed a massive move since March 2022 (return of 60%), as it has given a multi-year breakout and crossed 12,000 levels after December 2017. It has broken the triangle formation pattern. It retested this 12,000 level 2-3 times, and then now it starts a new leg of the rally and breaks 13400–13500 levels and reaches 14,800 levels. Looking ahead, it will appear to be a likely target of 15,500 in the short term, with the possibility of reaching 16,000 in the medium term. However, the 13,500 level is the strong support level, and below this, 13,400 is the second most important support level, he predicted.

For Nifty IT, he noted that it has given a strong rally from March 2020 to January 2022; after that, it has shown profit booking from the higher levels at around 39,440 levels and retested its 50 percent Fibonacci levels. It has been trading in a broad range of 26,000–31,500 for more than 12 months, and currently, it is trading in the middle of the range. Presently, it is trading above all important moving averages (20, 50, and 200 SMA). On the higher side, Rs. 29,600 is acting as an important psychological level; above this, we can expect a level of over 31,000 in the near-short term, while on the lower side, 26,000 will act as a major support during any correction, he forecasted.