IT sector funds have delivered good returns in the past year. However, investors are concerned about the valuations and prospects of the sector. Shivani Bazaz of ETMutualFunds.com spoke to Meeta Shetty, Fund Manager – Tata Digital India Fund, to find out what’s in store for the sector.Edited interview.
Around 92% in one year. You must be really pleased to be on the top of the performance chart. How do you see last year?
It’s been a very exciting year for the IT sector as well as our fund. Around the same time last year, there was clarity emerging on growth.
The Q2FY21 results saw most large companies come back strong after the degrowth seen in Q1FY21. Mid and small companies, though, were yet to see such sharp revival. The demand outlook, however, started to improve and was visible in the deal win numbers.
We saw opportunities emerge across the sector and started widening our portfolio holdings with the addition of mid and small companies. We also added a few internet names over the year. This strategy helped us in delivering the alpha.
Technology funds like Tata Digital have given decent returns in the last five years. Investors are charmed by the relative stability of these funds and superior returns. Are these funds evergreen like many investors believe? What should be the approach of individual investors?
Technology is ever-changing and the fear of becoming obsolete has been a worry for the sector. But over the past two decades, the Indian IT services companies have shown strong resilience.
The agility with which companies have been able to evolve and adapt to the changing world has been comforting.
This is visible in the constant market share gains, increased offshoring to India and the strong growth in digital revenues. Today, every sector is talking about going digital not only to optimize cost but to also drive revenues.
Digital has a role to play in all segments of an enterprise, be it manufacturing, sales, marketing, or human resource. As we look ahead, we see the world getting more digitized over the coming years and in turn giving growth opportunities to the Indian IT sector.
The industry research houses are also pegging the IT sector growth at much higher levels vs pre-pandemic growth which leads to good visibility at least for the next couple of years. Hence, a systematic approach will be ideal for the long-term investors, especially given the sharp return in the sector last year.
The portfolio of the scheme differs from many funds in the category. The scheme has less very large companies and more mid cap stocks. What’s the strategy?
The strategy is to have a healthy mix of steady compounders and alpha-generating opportunities based on growth and value. There can be times when the portfolio might be skewed towards either of the buckets, depending on the outlook and the valuations.
Last year we saw alpha opportunities in the mid-small space and started positioning accordingly. As these opportunities played well, it not only helped us generate alpha for our investors but also led to relatively less skew towards mega caps.
The valuations in the IT sector are worrying many investors. How do you see the situation? Is there still value in the market?
The valuations in absolute terms are certainly higher than the earlier peaks and it is trading at over two times the standard deviation to the sector average.
But the revenue size at which these companies are growing as well as the cash flow yields, balance sheet strength and payout ratios are all far superior. On relative valuations to broader indices, the IT sector is at around a similar premium as seen earlier.
While we don’t rule out a near-term correction or a consolidation given the tremendous run-up in the sector, we see enough levers of growth for the sector from a near to medium-term perspective.
How do you see the virus threat panning out in the long term? Does it still pose a threat to the global and domestic economy, especially the IT sector?
While I am not an expert on the pandemic, but vaccine rollouts and the opening up of economies are certainly positive for the world as well as our economy.
As far as the IT sector is concerned, it has been an enabler to function seamlessly to the world during the lockdowns and hence I don’t foresee much risk from the virus.
As enterprises get back to a growth trajectory, especially in certain sectors which were worst hit by the pandemic, the spend on digital should accelerate.
What is your advice to new investors getting into these schemes? What are the dos and don’ts?
Our advice, to existing investors as well as investors who have not been able to participate in this tech wave, is to take a systematic approach to benefit from the strong demand seen in the IT sector and to have a medium to the long-term investment horizon.
Should investors tone down their expectations from the technology funds? Can they expect double-digit returns from them?
It’s difficult to comment on the returns, but the demand outlook for the sector continues to remain strong which gives good visibility for the next couple of years.