Fears on the Wane
Market players were caught by surprise with a splendid rally of nearly 5 per cent from the lows of July 14. A couple of big gaps during the last one week has forced bears to deal with stops on their short positions and are causing underinvested bears to chase to add some long exposure. The longer the indices keep making higher highs and higher lows, the greater will be the anxiety to reposition for more upside. This action is a good illustration of something that financial expert Dough Kass says often, which is that the market has no memory from day to day
The red-hot inflation scare, the fears associated with crude on the boil, inverted yield curve worries and the concerns about slowing economic growth have totally vanished. And testimony of that lies in the figures of weekto-date (WTD) basis barring Nifty Pharma which was marginally down by 0.5 per cent while all the other sectors have logged massive gains. To everyone’s surprise, the top gainer in the list is Nifty PSU Bank, while the top second gainer would amaze you – it is Nifty IT! The Nifty IT index has jumped over 7 per cent on WTD basis.
With IT index in the limelight, it would be impossible to ignore the earnings that have recently been declared. The third largest IT company (Wipro) reported its quarterly numbers and it was a big miss as margins have disappointed and this is nothing new as the previous two Large-Cap IT companies i.e. TCS and HCL Technologies have reported a decline in margins which are now well below the prepandemic levels. So, despite margin shockers from IT companies, the rally in Nifty IT index is quite shocking and with this a question arises about whether this is just a momentum trading play or a trend reversal in the sector since everything might be discounted in the price?
Here is a detailed outlook on IT stocks since there are two sides to the same coin here. One is essentially the business momentum, growth and market opportunity forIndian IT services’ companies and we believe it’s very much intact. If at all the size of the opportunity and the ability of Indian IT companies and the value proposition which they have to offer is surely becoming a lot more compelling than what it was a year back or even a decade back and so to that extent we have no doubt in terms of the potential and the business momentum. That we believe is here to stay from a multi-year horizon and we remain as excited on it as we have been earlier.
On the flip side of the coin is the issue of the margins. It looks like the margins that we saw in calendar year 2021 probably were the best of the lot and we don’t think the margins are going to get any better than that. If at all, we will have to deal with an environment where the margins will be lower than the peak margins witnessed in FY21-22 and therefore it’s quite possible that one year forward the net earnings’ growth could be a lot more muted than maybe what the revenue growth is going to be. Thus, we are going to be in a situation where for the next one year or so the IT sector may not deliver the kind of returns or may not be able to outperform.
But if one is looking at the longer-term horizon investment in this sector, this dip actually is a good opportunity and may not materialise immediately but would do so over the next 3-4 years once it is back to business for IT companies. At that time they would start to outperform. Coming back to the markets, there is a definite reduction in market volatility over the last couple of weeks and it is a very common trait which is observed in strong bull rallies along with the FIIs buying which indicates resurgence in risk appetite from the FIIs camp. Now, going forward, on the upside, a big hurdle is placed around the levels of 16,800-16,900.
