IT sector is at an interesting juncture but volatility is expected in the near term: Kotak Mahindra AMC's fund manager

Harish Krishnan Sr Executive Vice president (Sr Fund Manager) Kotak Mahindra AMC

The information technology (IT) companies’ April-June 2023 quarter earnings announced so far have been muted but not as bad as feared and that is leading a section of the market to look for bargains.

The IT sector is at an interesting juncture but could remain volatile in the near term, said Harish Krishnan, Senior Executive Vice President, Kotak Mahindra AMC on Moneycontrol’s Opening Bell Show.

The IT sector has done well over a longer-term horizon, Krishnan said. Over the two-odd decades, the profit pool share has ranged from 5 percent during the bust of the dot.com bubble, to 8 percent of total profits during the global financial crisis (GFC) in 2007-08, and then to about 12 percent-13 percent before the disruption caused by the Covid pandemic, he said.

During the pandemic, the sector gained prominence as all sectors were performing poorly, and it benefited from both increased demand and higher margins due to reduced spending on travel, among other factors, he added. The profit pool share reached approximately 15 percent during that time.

Currently, that number stands at around 8 percent-9 percent. The estimation being made is whether this 8 percent-9 percent will remain at that level for the next two to three years or if it is likely to increase to about 12 per-13 percent. It is believed that there is a reasonable chance it could reach 12 percent-13 percent.

Outlook For IT Sector

However, he emphasised that it is a slowdown, which will be evident in the near term, given the highly publicised recession that has been unfolding for the past 18 months. Consequently, the near-term outlook may be more volatile. Nevertheless, the fund house considers the sector to be at an interesting juncture to consider adding the IT sector to portfolios.

Broadly, the overall market could see volatility in the short term, he said.

Time To Moderate Expectations On Indian Markets

According to Krishnan, both cyclical and structural narratives are performing exceptionally well, earning a "10 on 10" rating for Indian equity markets.

The cyclical trends, such as the sentiment against China and the preference for Indian companies, are currently benefiting India. Money is flowing out of China, and India is considered more insulated from the global slowdown due to its domestic-focused companies.

On the other hand, the structural aspect is also well recognised. India offers a credible alternative to other countries facing population and demographic challenges. This, combined with competent management teams and a promising growth trajectory, strengthens the structural case for investing in India. However, it is crucial to understand that these trends are transient and subject to change, Krishnan highlighted.

However, he advised some caution as the cyclical factors gradually fade and the focus primarily shifts to structural aspects. This can result in a situation where investors acknowledge the long-term potential but still consider near-term earnings and other cyclical factors.

Having said that, the senior fund manager said from a three to five years horizon, though the markets will be rewarded, expectations will have to be moderated significantly.

Consequently, he favours investing in large-cap stocks rather than small-caps given the expensive valuations of the latter, at least for the near term.