The IT space is simmering, with valuations far outstripping their long-term averages, yet they do not seem to be out of bounds. But, Ram Kalyan Medury, Founder and CEO of Jama Wealth, sees some corrections ahead with the Fed raising the policy rates at a rapid pace.
In an interview to Moneycontrol, Medury shares that the success of the upcoming public issues will determine the trend in the primary market. Excerpts from the interaction:
How do you approach IT stocks especially after earnings by IT majors? Do you see any impact of Fed rate trajectory on the IT space?
Technology has become the backbone of the global economy and the listed Indian IT majors have grown well. TCS, for instance, is among the top ten IT companies in the world and continues to shine bright with its continued, consistent broad-based mid to high teen YoY growth across verticals and geographies. Margins, deal wins all look good as of now but in the post-COVID talent wars employee costs have escalated.
We expect the companies to focus on cost control over the next two years. The BSE IT index is down 10.63 percent from its all-time high but has also clocked 33 percent growth from its low last year. It is not a time to go overboard on these stocks and one ought to keep the allocations moderate.
The IT sector has been having a tough time of late. While various sectoral indices are seeing some turn around, the IT index has seen most of its basket stocks struggling below their 200 day moving averages. The sector is dominated by the large global Indian MNC exports whose fortunes are inextricably linked to the global economy. Their main market US is looking at a looming recession with two quarters of negative GP growth. The bellwether housing sector is seeing a massive dampening of demand due to high inflation and high interest rates. Perhaps due to their proximity, the FIIs might be more pessimistic in their outlook which has resulted in these stocks languishing..
If the Fed raises interest rates further; ie we could continue to see the IT stocks under pressure. It is difficult to say whether any sector has bottomed out, at any point in time. IT bottoming out is closely linked to the index itself bottoming out, which again is difficult to say given the global uncertainties, amidst the looming recession in the US. If the Fed raises interest rates further IT stocks could see another round of correction.
As of now the industry seems to be looking at a decent Q1 and Q2 because discretionary spends are not yet impacted. If H2 is maintained then the FY23 guidance could be met by most large players, at least the lower end of the guidance. Times like these could offer a good opportunity to buy high quality tech companies at reasonable prices. As long term investors, we always look for good quality companies regardless of the price action, because macroeconomics is difficult to predict.