Information Technology: The Contrarian Bet Now?

The IT sector appears to be out of favour with its valuation falling by almost 31 per cent year-to-date (YTD). Furthermore, Nifty IT has dropped more than 23 per cent YTD, behind Nifty 50, which has gained around 0.75 per cent. So, does this seem like a good time to buy great IT companies the contrarian way? This article is an effort towards finding out the same

According to Statista, the Information Technology (IT) industry contributed 8 per cent to India’s Gross Domestic Product (GDP). This is somewhat higher than in FY21 which was at 7.7 per cent but significantly lower than in FY15 at 9.5 per cent. Furthermore, it accounts for around 59 per cent of the worldwide services’ sourcing industry. In reality, the year 2021 proved to be a blockbuster for IT stocks and their investors, with Nifty IT returning over 58 per cent and Nifty 50 returning close to 24 per cent. In reality, after the pandemic wreaked devastation on the world, IT firms performed exceptionally well and many IT-specific new fund offers (NFOs) were launched in 2021.

As shown in the graph above, Nifty IT outpaced Nifty 50 by a wide margin. However, as can be seen, the Nifty IT has been falling since January 2022 and is presently trading at the levels of July 2021. However, this raises the question of whether it is prudent to invest in IT businesses the contrarian way. We will examine herewith the current state of the industry, sector valuations, the performance of large-cap IT businesses, and understand if it makes sense to bet on this sector. Technology was the solution that allowed businesses to not only keep the lights on but also pivot their business models to online mode, adapt goods and services to growing market dynamics and customer wants, and enable cooperation in a remote work paradigm for both international and Indian end-user organisations.