Can investors in IT stocks expect exponential returns going forward?
Technically and fundamentally, IT was one of the first sectors to pick up pace (after the market crash last year). It did very well and the positivity of the potential global recovery got built into these stocks.
Now most of these stocks are trading much above their historical valuations. The growth rate would still be around 8-10 per cent over a 2-3 year timeframe. The strengthening of the Indian rupee is not a margin tailwind. The impact on margins for IT companies could be more than what most people expect because wage inflation is expected to be higher. There is a shortage of skilled professionals given the way growth has suddenly picked up and the rupee is no longer helping these companies.
So my guess is that technology earnings could potentially disappoint in the short run. Given the valuations that they trade at, this sector could underperform. The only positive thing about these companies is that most of them are doing buybacks and so corrections will also not be very deep. But the potential of any significant returns is low.
Amid the rally in the broader market, any particular midcap stock that you have liked?
One of the companies we picked in the last couple of months is VA Tech Wabag. Although consumption will suffer in the second Covid wave, but companies that have well-funded projects should do well. The interest rates are also low. The stock used to be very highly valued at one point of time – around Rs 800 or so. It fell to below Rs 200 and is now trading around Rs 270. They have a significant order book, which is at an all-time high. Their high debt was a big concern but now they have become virtually debt free. The project execution over the next couple of years is expected to be very strong and valuations are cheap.
Do you still find buying opportunities in the smallcap space?
Smallcaps are all about individual stocks. They tend to be risky because a lot of them are driven by news flow, which may or may not play out. The growing retail activity leads to an upturn in stock prices, especially those in the limelight or the ones which are suddenly doing well.
