What is your long-term view on IT? We have seen a massive run up here, Infy joining the $100 billion m-cap club. This month, Tech M has gone up 30%. Going forward, do you see It continuing to be among the strongest growth sectors, propelling the share prices higher? Or at the current share levels, are the strong growth prospects already priced in?
Let’s look at the broader market. Any sectoral or in stock performance besides the function of its own financials is also a function of the markets, especially in the short term. So let me start with the markets. We are more or less over with the result season of June quarter. That is done and dusted. We know what it is and at least in my view, there have been more positive than negative surprises. In fact, it has been better than expected,
The monsoon uncertainty is also over. Oil price which had started to move up seems to be topping out, corrected, moved up again and hopefully should not go up further from here. The festival season is something that we will be entering in. In view of all these factors, I somehow feel that we can see the market remaining range bound. Of course, I can go wrong and it is always difficult to predict the markets in the short term and the market has continued to give surprises, moving continuously against the general consensus for the last one-and-a-half years.
Having said that, if I stay with my view of market remaining range bound, then that is where the performance of the defensives will come in and which is where the IT sector comes in along with FMCG and pharma. These are the three major defensive sectors where we have already seen outperformance. It is quite likely that in the short term after such a sharp outperformance, we could see some breathing but when I listen to the managements’ commentary, in earlier quarters and even after this quarter’s numbers, the way they are facing attrition issues and the way they have talked about the numbers of hiring that they will do and the growth that they are seeing, the feedback that they are getting from the clients and in general is IT participation is increasing in our daily lives.
So to me, it looks like the sector will continue to report growth and will continue to outperform. In the process, will valuations keep getting re-rated? Probably yes. From trading at around 15-16 forward PE, the largecaps have moved to 25-30. But I would not be surprised if that re-rating keeps happening because the companies are giving that kind of performance with reasonable certainty, unlike in some other sectors like metals which keep giving good performance but are a commodity and have cycles.
In IT, there is no cycle. It is more or less growth. Of course, the growth rate keeps going down or going up. There might be a breather after such a sharp rally, but irrespective of that, a long-term outperformance is still there. In my view even re-rating can happen from here.
So talking about themes that do have cycles, we are definitely in the up cycle phase for metals. IT is not a part of that. Would you still go for cyclical themes?
I have no moral authority to comment on that because I have been wrong or rather I do not find myself capable enough to track the commodity cycles, the commodity prices, the demand and supply and the dominance of the global factors, within that the domestic factors and things like that. My view has not been right in the past also, but before giving the view, if I have to observe the relatively recent shorter term performance of the commodities, of the metals index, of the metal prices almost for last four months now, the initial peak had come in May 2021 and then May-June was flattish. In July again, there was an uptrend which has now again subsided.
So in the last four months, we are seeing signs of topping out stock prices, signs of metal index showing consolidation and commodity prices not moving at the same rate at which they were moving. So if at all I take that as a signal, maybe we have reached the peak of the commodity prices. Maybe there can be further rise, a little bit here or there, but not at the same pace at which it was observed in the last one-and-a-half years.
