IT stocks are currently experiencing a remarkable surge, as evidenced by the Nifty IT sectoral gauge delivering a 38 percent return this year, nearly double the gains of benchmark indices. In the ongoing month alone, the Nifty IT index has posted a substantial return of close to 10 percent, outperforming Nifty50’s five percent gain.
Despite the extended valuations of certain blue-chip IT stocks, the sector continues to exhibit strong momentum, prompting questions about the duration of this bullish trend. Some skeptics even ponder whether the current scenario resembles a bubble that could burst at any moment.
Market experts, however, maintain overall optimism regarding the IT sector, citing robust fundamentals and a positive business outlook, notwithstanding concerns about elevated valuations. The Nifty IT index holds a weightage of 18 percent in the Nifty50 gauge, second only to the financial sector.
Arvind Sanger from Geosphere Capital raises concerns about high valuations, stating that IT stocks may have advanced beyond reasonable levels due to being perceived as a safe haven in the current market. He emphasizes that while the situation is good, it may not justify the multiples at which some stocks are trading.
Wipro leads as the top performer in the current fiscal year with a 53 percent return, followed by Tech Mahindra (43 percent) and Infosys (27 percent). TCS has registered a 12 percent increase during this period. Surprising analysts, most IT companies have reported strong Q1 earnings and an optimistic outlook for FY22.
Motilal Oswal notes that Indian IT service providers demonstrated exceptional growth in Q1, marked by robust sequential growth in dollar terms across geographies and services. The positive outlook for FY22 reflects a strong start to the fiscal year and a favorable demand environment, driven by significant tech spending related to Cloud migration.
Despite concerns about stretched valuations and rising attrition, the demand for IT services has led to a re-rating of the sector. Experts anticipate continued outperformance in the short to medium term, driven by the acceleration of digital transformation in western countries and the current sentiment favoring the Indian IT sector.
Mutual funds are actively buying IT stocks, with expectations of a catch-up as some large funds are still neutral or underweight in the sector. The consensus among experts is that the growth in IT stocks is backed by sound fundamentals, dispelling notions of a bubble, and the sector is poised to continue delivering favorable returns.