Samir Arora has zero allocation in stocks of this sector for the first time ever

After a significant outperformance last year vis-a-vis broader markets, IT stocks have been under pressure this year on fears that global economic uncertainty will crimp IT spending. The Nifty IT index is down 25% year to date, against 6% gain in broader Nifty50 index. 

The IT industry, which saw demand sky-rocketing during the pandemic on the back of a global shift to cloud-based technology infrastructure, is bracing for an economic challenges in major markets in the United States and Europe, with industry experts saying big deal wins are becoming difficult to convert.

Last week, speaking to investors in New York on Thursday, HCL Chief Executive C. Vijayakumar said he expects revenue growth for the year ended March 31, 2023 to be at the lower end of the company’s current forecast of 13.5%-14.5%.

“Some of the macros like furloughs, some drop in discretionary spend in tech, telecom and a few other verticals are a little bit more than we expected at the beginning of the quarter,” Vijayakumar said. IT stocks have been under pressure post caution sounded by HCL Tech management, with HCL Tech falling as much as 7% on Friday. 

“We do expect this to be an industry-wide problem and not an HCL Tech specific one,” Nirmal Bang analyst Girish Pai said in a note, adding that the Dec quarter, and possibly the first quarter of 2023 were going to be growth challenged for the industry, “maybe a bit more than earlier anticipated.”

Samir Arora’s View on Broader Markets

The Indian equity markets could revert towards a long-term trend of returning 10%-15% on average in rupee terms next year, he told Reuters.

Our view is that the U.S. market will bottom out in the next three-four months as most of the risks around inflation and interest rates would be factored in, Arora said in an interview. Once that happens, the overhang on Indian markets will reduce and we could see absolute returns as well.

“So far, India’s outperformance has been relative, but we should see a move back to the historical average of 10-15% returns,” Arora said.

In dollar terms, however, the Indian markets are negative so far this year, since the rupee has declined about 11% against the U.S. dollar in the same period.

Much of India’s outperformance in 2022 has been on account of domestic money since foreign investors have withdrawn a net of $17 billion so far from the local markets. This could reverse next year, believes Arora.

The general tendency of foreign investors, he said, is to buy India and very rarely have we seen two consecutive years where they have remained sellers.

Helios Capital remains the most positive on banks and consumer companies that cater to lower-ticket spending.

“We prefer to play the economic cycle through banks because they will go in whichever direction the economy goes and we don’t have to take a call on that,” Arora said.

The clean-up in banks’ balance sheets over the last few years also aids the confidence in lenders, he added.

While not betting on a large capex cycle in the Indian economy, Arora said the fund has bought into defence companies, where there seems to be a government push.

They are, however, staying away from most traditional infrastructure companies where the government is the direct customer, he said.