“And we are bound to do well, now whether it will be after three months or six months is someone’s call, but I think we definitely have made bottom in for the largecaps in last three-four months and from here on you will see a lot of return in the largecaps. Now, what I mean by a lot of return is between 15% to 25% which I think is a great return,” says Sandip Agarwal, Sowilo Investment Managers.

Why is IT sector at a time when there are very little tailwinds and a lot of headwinds is still trading above its five-year average and stocks like TCS have actually done exactly what Nifty has done in the last one year. If the news is bad, if the business is not growing, why is IT still holding on and why are stocks like TCS outperforming?
It is absolutely very good question and I can tell you something. I have always been a little contrarian in that sense, but I can give you one data point. You go and see in history last 30-35 years, whenever the front runners of the tech have done well, we have done extremely well after 6 to 12 months lag. And despite all the concerns of hard landing in US and recession and everything, Nasdaq is almost close to new high and you will be surprised to know a largecap company like Microsoft is up 67% in just one year and some of the other names like Meta and all have done even better than that.

And we are bound to do well, now whether it will be after three months or six months is someone’s call, but I think we definitely have made bottom in for the largecaps in last three-four months and from here on you will see a lot of return in the largecaps. Now, what I mean by a lot of return is between 15% to 25% which I think is a great return.
So, because the dependency of this large companies in the US is very high now compared to earlier on Indian IT companies because for sourcing they have to come here. So, it is just a matter of time. And I can tell you with a lot of confidence that you will be positively surprised by the numbers this quarter versus what analysts are expecting in my view. Maybe barring one or two companies which can have some challenges, but broadly the budgets, the deal wins will surprise you positively.

What has changed between Jan and now because when we spoke the same managements, in Jan they were sounding okay, theek hai, we do not know, yes, we are bullish, but near-term hard to fathom, orders are coming but that is not getting translated into real business per se. Similarly, if I look Accenture numbers also, they do not inspire too much of confidence which is almost like a canary in a coal mine, what is happening to the IT sector. You have a contra view. So, I am curious why.
This is a B2B business and 25-30 clients make all the changes for any company. So, they speak what they see. So, this year I think you should compare strictly with January 21 and March 21.

In January 21, everyone was cutting guidance and in March 21 everyone started upgrading guidance. This year I think I will compare with 2021 when people were very negative in the month of January because they were seeing a lot of impact of COVID and all that and suddenly in March they realised that oh, we need technology to even survive in COVID. I think we are in the same phase right now. In Jan and Feb, people were sceptical, I think in March and as we go forward in April and May you will see the commentary changing dramatically. So, the numbers will be of March, but the commentary will be more of May.

I would say that maybe on number front you may not see big surprise or it will be slightly above estimate or in line with estimate, but the commentary will be much better than that. Because now things are opening up in a big way.
You see data which has come from ISG also. It suggests that there is underlying current which has started to flow in. So, I think the commentary will be very positive.

What about valuations? Okay, let us assume that commentary will be positive. They will come out and say that worst is behind us. But can I argue back and say, and again, being a devil’s advocate here, I am purposely taking a different stand than what you are taking, from a market standpoint the fact that these stocks are still trading at a premium to their five-year averages, does that mean that the upside even with positive commentary is going to be limited?
Yes, you are absolutely right because for example, in the midcap space if you see the valuations are really-really rich and from here valuation re-rating would not happen. Whatever you grow or whatever you are able to surprise on the earnings, that is what you will get. But in the largecap names like TCS, Infosys, HCL, Tech M I think there is a valuation re-rating scope also by 5-10% and there is earnings surprise delta which will also come.

Remember, in largecap IT generally what happens, they will have three-four years where they will give 8-10% return and then there will be one year when they will give 30-35% return. So, average you will make 12-13% over a long period of time. I think this year is again the year where you will make outsized return of 20-25% or maybe 30% in the large names and then again as you rightly said that valuations being rich they will again give normal returns in the next two-three years, so that is the way I look at it. I think the way Nasdaq has performed, the components of Nasdaq have performed the flow of those growth will come to Indian IT in next three to six months. And when that starts coming in, analyst estimates will get revised upward for at least two-three quarters and that will drive both the re-rating and the stock returns that is the way I look at it.