When is the right time to pick up IT stocks? Deepak Shenoy answers

The difference between the outperformance and underperformance by IT is very stark now. The IT index this year is down 25%, the banks this year are up 14%. So the gap if I add 2 and 2 together is actually 40% this year?

It is and IT did a super move last year. It is kind of compensating for that and banks did not have any super move and so they are going up. From the end of 2020 to now, you might find that the banking index and the IT index are roughly neck and neck. IT probably still beats it to a certain extent.

Banking is likely to get more affected by potential interest rate changes going forward, IT a little bit less. I think IT has already taken it on the chin in terms of worldwide recession coming in or the fear of worldwide recession coming in and so any positive news on that front or change in stance by any player here might affect IT more than it will the banking sector. We have investments in both and so I am happy if either one does well.

IT companies have two challenges; demand could slow down because of recession and attrition which refuses to go lower. Now how can they both coexist? Either demand has to come down because of recession and if demand is coming down then attrition has to go down. These problems are coexisting, one has to make way for the other?

Yes, in fact, it is a complex problem because what happened in the last maybe a year is that attrition was high. So companies decided to over hire in a way because they could not get enough people to join. A lot of people would take their offers but not turn up on the day they were supposed to turn up.

So, there was a little bit of over hiring in anticipation that there will not be enough people joining and they still needed to meet the demand. At one level, while the demand has come down, on the other side, we are seeing that they got more people joining in than they could have otherwise realised. Which is why IT has gone for cut in variable pay kind of thing. It is a signal to say well we do not mind lightening ourselves up a little more.

However, I feel demand here is maybe temporarily down but eventually as recessions set in, cost cuts become more advantageous to the Western economies and one solid way to cut cost is to outsource. So, more and more outsourcing will come in the days to come. I feel that the current situation is pretty much like what will happen for the rest of the year perhaps and from January onwards, we might start seeing some of the larger deals start to come into play.

It would not be a great time for IT companies even this quarter and the next, but from the March quarter onwards, till the next year when budgets are reallocated, IT companies will do well and perhaps stock markets will typically lead this anticipation by about two or three months. This might be an interesting time to take IT on for the next five to six years as a cycle.

Are you invested in any of the defence names?

Yes, we are invested. There is a lot of momentum in these stocks and it is strange because PSUs are the ones that are making these new highs and jumping so far up without any indication that there will be a higher defence budget. Defence budget has not actually increased dramatically in the last four years. I do not know whether to buy totally into the optimism. We do have positions here but I am a little surprised that the stocks are moving so much so fast.

However, these are good long term stories but the fear here is the PSU tag which could make them do things that would not be favourable to shareholders but favourable to the government. So, there is a tussle already but I’m happy to see this happen from actual defence orders coming.

But if you look at most of the management speak also, I think it is going to materialise three or four years down the line based on whatever we have right now. It is becoming evident that at some point, we are going to have to replace old defence equipment, especially considering the new political situation of Russia versus the rest of the world.

Most of our equipment come from Russia as well. So maybe, that is what prompting some of this. The good point is at least the business goes to Indian companies but there will be more players here and whether it is Bharat Forge, M&M or the smaller players who have done a lot of these small things earlier or

and , we will have to wait and see.