SBI IT Fund, Tata Digital India Fund, others shine as sentiment improves

Technology funds have made a comeback in the past year, emerging as the top category performers among equity funds. For a one-year period, these funds have returned 39.5 per cent, comfortably beating other sectoral funds. While FMCG (fast moving consumer goods) funds have given healthy returns of 25.5 per cent in the past year, pharma, banking and infrastructure funds have performed poorly, returning 1.6 per cent, 9.3 per cent and 10.8 per cent, respectively. 

Technology funds have also beaten large, multi and mid-cap categories, which have given returns of about 13 per cent each. Tata Digitial India Fund, for instance, has been the top performer with one year returns of 52 per cent. 

“The order flow from US and Europe has improved and the guidance from some of these companies has signalled a turnaround in sentiment. IT (information technology) was an under-owned sector for quite some time and fund managers as well as foreign portfolio investors have stepped up buying into these stocks in the past few months,” said Kaustubh Belapurkar, director, fund research, Morningstar India. 

According to analysts, some Indian IT companies are entering a V-shaped earnings recovery phase on the back of huge digital-led demand, currency tailwind, potential margin improvement as digital gains scale and share buy back initiatives. “With acceleration in revenue and digital gaining scale, double-digit earnings growth will soon become a reality. Moreover, the buyback impact will be substantial and add almost 200-400 basis points (average) further markup to earnings growth. We estimate earnings growth to jump almost 3x to 13-15 per cent over FY18-21 from 3-5 per cent in FY16-18,” said Edelweiss.

Last week, India’s largest software company, Tata Consultancy Services’ (TCS) market value surpassed the $100 billion mark, following the above expected March quarter results and the street seeing value in it’s organic growth plans. 

“We believe the recovery is more structural in nature, aided by the global digital services market moving into implementation mode, with a secular pick-up in application development demand leading to larger contract sizes,” said Diviya Nagarajan, analyst, UBS.

The current rupee depreciation against the dollar may boost the sector’s revenues. “Rupee depreciation, if any, against the US dollar, could offer relief in the near term and help offset any investment negatives,” Nagarajan added. The sector was adversely impacted by the rupee appreciation in the past three years. However, the currency has depreciated 4.5 per cent to 66.8 levels against the dollar in 2018 so far, making it among the worst performing currencies in Asia.