IT stocks are expected to do well. How much of that is in the price?
It is a moving target. As IT companies report better numbers, analysts are going to upgrade their earnings and ascribe a higher PE multiple as well. My view on IT is that these are companies which have been erstwhile favourites of many investors, professionals as well as novices and they have a good track record, good corporate governance standards and a high return on capital. The only problem in the past three-four years was stagnations and earnings. But the Covid-19 pandemic has been a shot in the arm for the entire IT industry because spends have gone up, increasing transformation towards digitalisation has picked up and they are seeing better order flows.
IT has been able to manage its operations seamlessly in disruptive times like this and as we speak, the markets are gradually realising that in the next three-four years, you could see compounding of earnings and a kind of secular up move as far as their financial performance is concerned. That is getting priced in in terms of higher PE multiples and considering the way our technology stocks are quoting, the way growth companies are quoting globally, from this point on, IT can tend to outperform.
Of course, there will be overall market corrections down the line, There could be a few disappointing quarters here and there, may be company specific or industry specific. But if you take a 3-5 year view, IT earnings will be significantly higher than what they are now. They could even perhaps be 60-70% higher and that certainly will justify higher valuations for the entire sector. We remain quite positive on IT companies. Initial results have been good. Follow up results from midcap companies by and large are being in line.
Investors should have a good strategy in place if they are underweight IT as to which stocks they should buy, the timing of purchases and the sectors that they should be underweight on. On the whole, we remain positive on IT and this is a longer term view. I cannot clearly respond how the markets will move and how IT stocks will move over the next week or month or so.
The two most crowded trades have been the causality trades — Bharti and ICICI Bank. ICICI Bank found its feet earlier this week and late last week and Bharti is finding its feet now. Your view?
I appreciate your observation that these are over owned stocks — ICICI and Bharti Airtel. Certainly both these companies held a lot of promise. There was scope for earnings to move up and they were available at a decent valuation compared to their peer group. They attract a lot of investors. But at the end of the day, we have realised that if you like a story, if you like an investment theme or a sector, go with the market leader and see what has happened over here.
Bharti Airtel has significantly underperformed Reliance which basically is a play on Reliance Jio and ICICI Bank had underperformed HDFC Bank which is a larger peer group company where the performance has been exceptionally good. That is a learning for all investors that if you like a specific investment idea, then stick to the market leader over there. It is the market leader which is actually dictating the terms as far as the industry is concerned. It is quite visible with the way Reliance Jio has entered into the post paid market also. The number two and three players had to play second fiddle.
Eventually the gap between the leader and the second or third player will narrow but at the end of the day, investors will tend to see some more under performance as far as these two companies are concerned. If you are already invested in ICICI or Bharti Airtel, it is better to remain invested.
But next time you have a good idea or a good investment theme, instead of going for the cheapest stock in the sector, it is just better to close your eyes and go for the market leader. That will play out much better than buying into the tier II, tier III companies.