In 2021, it has been in news for all the wrong reasons. The stock underperformed in a market where nearly every other stock had nearly doubled. It had become a meme stock, the butt of jokes among investors for its massive underperformance.
From April 2020 to January 2021 low, ITC stock was up 30%, while BSE Sensex was up 133%.
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Although the company’s earnings growth met forecasts, a number of worries restrained the stock’s surge.
Investors were concerned that its cigarette business would turn off international funds who are increasingly interested in environmental, social, and governance investing.
Also, the corporation had not advanced its intentions to spin off the FMCG division, which might have unlocked a tremendous amount of wealth for investors. Investors were troubled by this underperformance, which ultimately caused them to lose all confidence in the company.
And finally, as the saying goes, sometimes luck strikes when you least expect it.
ITC took a parabolic action.
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The stock increased from 220 in January 2022 to 356 by November 2022, up over 60%, and eventually reached its all-time high of 392 in March 2023.
These enormous profits occurred during a period of extreme index chaos. Between January 2022 and March 2023, the stock increased by 78%, while the BSE Sensex fell by 22%.
ITC was therefore in the news this time for all the right reasons.
It defied the trend by outperforming both the broad market index and some of the finest stocks. The outstanding performance is partly attributable to improvements in the business’s foundation.
In 2020–2021, the IT industry was likewise traveling in the same direction as ITC.
For around three to four years, the pandemic sped up the adoption of digital technology. It fundamentally altered the world and forever altered how businesses conducted themselves. As a result, technology adoption and digitalization have undergone a dramatic transition.
Future-oriented technology are being embraced by businesses more quickly than ever before. Their choices in terms of purchases and investments have changed to include things like cloud computing, a seamless customer experience, the Internet of Things (IoT), and artificial intelligence (AI).
The potential of the Indian IT sector was boosted by this move. The success of the BSE IT index, which doubled in value between its low in April 2020 and low in April 2022, was a good indicator of this.
But as the saying goes, everything good has to come to an end. The events in the IT industry are evidence of it.
The BSE IT index decreased by more than 25% between April 2022 and March 2023. However, the BSE Sensex decreased by 3%.
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This occurred against a backdrop of pervasive worries about the world economic downturn, which caused reductions in IT spending in important countries including India, the US, and Europe.
an abrupt increase in global inflation and the forceful monetary policy responses from central banks in industrialized economies.
According to a new report from technology research company Gartner, global IT spending would expand by 0.8% in October 2022, following a 0.2% fall in 2022.
Yet in addition to weak demand, the industry’s soaring attrition rates have fueled the flames. Since the epidemic, the accident rate had been rising, but it reached an all-time high in the middle of 2022.
The route to profitability was therefore difficult for IT companies because they also had to deal with increased staff costs and a cross-currency movement.
The destruction damaged investor confidence, which led to the sector’s severe underperformance.
The majority of IT companies are currently trading below both their three-year average PE and all-time high PE.
TCS is selling at 28x PE, which is 16% less than its PE during the past three years and 30% less than its PE peak of 40x.
Infosys is currently trading at a PE of 24x, which is 36% below its all-time high PE of 38x and 17% below its PE for the past three years. Also available at a discount to their all-time high PEs are HCL and Tech Mahindra.
The IT sector is selling at excellent prices, similar to ITC in 2021. simply because the stock price has already factored in the majority of the negative news.
Will the IT sector produce long-term investor returns, like ITC? We are unable to be sure.
Yet, only once in the previous fifteen years has the BSE IT index outperformed the BSE Sensex for three straight years. Hence, reducing concerns can rekindle investor interest in the industry.
However, it looks to have peaked and started to moderate due to high staff cost rates. Even the cross-currency effect might not last much longer given that some economists predict a decline in the value of the US dollar.
The upkeep of current IT infrastructure and the digital transformation of organizations across industries should maintain robust demand for Indian IT services, even though it is possible that demand will continue to tighten as customers optimize their overall IT spending.
in conclusion
One of the industries in the nation with the fastest growth and highest levels of success has been the IT sector. It significantly impacts India’s economic development, jobs, and foreign exchange revenues. In fiscal year 2022, IT contributed 7.4% to India’s GDP; by fiscal year 2025, it should contribute 10%.
This demonstrates the sector’s overall growth potential.
But you should conduct your study beforehand before going all in. Several businesses in the industry are specialized in various fields.
Despite the likelihood of big returns, it is crucial to conduct careful research before purchasing any stock.
Disclaimer: This article is for information purposes only. This is not a stock recommendation and should not be treated as such.
This article is syndicated from Equitymaster. com
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