How do you protect capital right now when it comes to IT? Do you add further into these dips or would it be prudent to partially profit take?
As far as the IT sector is concerned, let us look at it in two parts; one is the revenue growth trajectory and second is margins and valuations. The runway for growth on the top line and revenue is fairly good and there is visibility from the current deal flows in terms of growth at least over the next few years.
Clearly the acceleration that we have seen in terms of digital technology as well as digital transformation continues to go through and deals are coming through in this space. You have seen that the deal flow momentum remains strong.
On the margins side, clearly there are supply side pressures. The attrition levels have gone up quite sharply. Companies are also operating at utilisation levels which are high and that means they need to add talent. Also, wage hikes are taking place, which are all adding to the margin pressure.
The way IT has outperformed in the last one year, clearly at this point in time, from a valuation perspective, midcap IT in pockets is trading higher than largecap IT in terms of valuations. Therefore the room for error in terms of growth expectations and earnings trajectory as far as midcap IT is concerned, is very, very low.
The way we are playing the IT sector is while this is a structural theme in terms of growth on digital transformation, our preference is clearly for large cap IT over midcap now given the current valuations.
We also believe that largecap players will be better placed to manage some of the supply side challenges that are there for the industry and also manage the attrition pressure and wage pressures better than the midcap space. That is how we are looking at IT.
