IT Stocks
Is this a good time to invest in IT stocks?” How often did you encounter this question in lockdown? Why the question and why the buzz?
India’s IT industry contributed around 7.7 percent to the country’s GDP (Gross Domestic Product) and is expected to contribute 10 percent by 2025. The total number of employees grew to 1.02 million cumulatively for four Indian IT majors (including TCS, Infosys, Wipro, HCL Tech) on December 31, 2019. “With the buzz for the pandemic, set in a buzz for the stock market.” Agents gripping their seats and investors counting their money were all about the experts predicting how the market was going to plummet in these dire circumstances. A recession was the new calamity predicted. A replay of the 2008 crisis was a hot topic in every discussion.
But….
On Analysing the stocks of major IT companies like TCS, Infosys, HCL Tech, Tech Mahindra, and Wipro, it can quickly be concluded that the shares are back to the pre-COVID levels. Pre COVID-19, market capitalisation on each major exchange in India was about $2.16 trillion. The 2019 stock market rally was limited to 8-10 stocks within the large caps. The Sensex returned around 14% (excluding dividends) for the year 2019 but prominently featured blue-chip companies such as HDFC Bank, HDFC, TCS, Infosys, Reliance, Hindustan Unilever, ICICI Bank, and Kotak Bank, without which Sensex returns would have been negative. However, at the start of 2020, there was overall recovery, which led to both NSE and BSE traded at their highest levels ever, hitting peaks of 12,362 and 42,273, respectively. At the beginning of the year, there were close to 30 companies expected to file IPO’s. The market conditions were generally favorable as they witnessed record highs in mid-January.
It should only seem logical that the IT sector being a significant exporter should have been worst struck given the fact that the world market is significantly affected, especially with the US being one of the biggest importers of Indian IT products.Yet a majority of companies show margin expansion (increase in profit percentage).
Stupefied? What could be the driving factor?
To answer this, let us answer a simpler question.
Why did the stock prices fall in the first place?
Ever since COVID 19 struck, markets loom under fear as uncertainty prevails. It has sent markets around the world crashing to levels not witnessed since the Global Financial Crisis of 2008. Following the strong correlation with the trends and indices of the global market as BSE Sensex and Nifty 50 fell by 38 percent. The total market cap lost a staggering 27.31% from the start of the year. The stock market has reflected the sentiments this pandemic unleashed upon investors, foreign and domestic alike. Companies have scaled back; layoffs have multiplied, and employee compensations have been affected, resulting in negligible growth in the last couple of months. Their clients in other countries have been adversely affected. Employees can’t go to the office. Moreover, there has been an Economic slowdown all over the world. If unemployment increases, imports could be curbed to create employment opportunities. All these led to the great fall in the first place. Many companies attained their 52-week low in March.
But the time was not far when things started to improve gradually. After the declaration of the quarterly results, the upheaval is observed. Of course, it showed losses but unexpectedly increased profit for some companies as well. How was this accomplished? Adaptability was the key all along. The positive impact of work from home led to high productivity, with employees finding a better work-life balance. Many IT companies are considering extended work from home employment type for their employees. TCS has now planned to move 75 percent or 4.48 lakh of its global workforce (including 3.5 lakh in India) to permanently work from home by 2025. Note that TCS has over 448,000 of the consultants in 46 countries.
Higher realisation due to Rupee-appreciation due to billing in foreign currencies. This essentially means that as the Rupee value increases, the same dollar will give you more INR than before. Most of the companies showed Deal wins. Midcap IT firms like Mindtree Ltd and L&T Infotech Ltd won large deals and renewals in areas dominated by tier-I IT firms who have moved to larger digital transformation deals. Infosys reported $1.7 billion worth of large deal wins in Q1—almost on par with its average quarterly wins since Q1FY20 figure of $2 billion. Five of its 15 big deals were in core banking, financial services and insurance. Infosys shares have gained 10% after it reported Q1 earnings. HCL Technologies reported 11 net new transformational deals led by key industry verticals including telecom, financial services, manufacturing, life sciences, and healthcare. It also reported renewals of large deals and a strong demand and deal pipeline in the June quarter.
IT being an Online Industry, still stood to gain, if not as much as healthcare. The added benefit of no employee travel cost was a major plus.With adaptability being the bottleneck, it is expected that the demand for online products will sustain the IT sector’s growth in the years to come.
