IT services companies' index weighting reaches record high of 18.8%

Combined m-cap of IT firms on Nifty50 up 33.3% in 2021 YTD

India’s top information technology (IT) services companies, such as Tata Consultancy Services, Infosys, Wipro, and HCL Technologies, continue to raise their dominance on D-Street. The combined weighting of the technology (tech) majors on the benchmark Nifty50 has now reached an all-time high of 18.8 per cent as tech stocks continue to outperform the broader market, despite their record-high valuation. In comparison, tech companies accounted for 15.8 per cent of the Nifty50 a year ago in December 2020 and 12.3 per cent in December 2019.

The combined market capitalisation (m-cap) of the top five IT companies — that are part of Nifty50 — is up 33.3 per cent since the beginning of the current calendar year, against a 20.7 per cent rise on the index combined m-cap during the period.

The tech sector outperformed the broader market on Monday as well. While the combined m-cap of all Nifty50 stocks was down 2 per cent during the day, the tech sector’s combined m-cap was down 1 per cent on Monday.

This makes the IT sector the second-biggest market mover on D-Street behind banks and non-banking financial companies and insurance, which still leads the charts with 33.1 per cent weighting on the index.

The IT sector is, however, ahead of traditional market biggies, such as the oil and gas sector (12.5 per cent weighting) and fast-moving consumer goods (10.7 per cent).

The five IT companies — that are part of the Nifty50 index — have a combined free-float (non-promoters’ stake) m-cap of Rs 13,36 trillion on Monday, against the index total free-float m-cap of around Rs 71.3 trillion. The movement on the index and stock weighting is calculated on the basis of free-float m-cap, rather than the total m-cap.

The IT sector is, however, much bigger when the overall m-cap is taken into account that includes all outstanding shares. The top five tech companies had a combined m-cap of around nearly Rs 29 trillion, accounting for 22 cent of the combined m-cap of Rs 131.8 trillion on Monday.

Analysts expect a further rise in the weighting of the tech sector since most stocks are expected to outperform the overall market.

“Most long-term and institutional investors are overweight on the top companies since the sector is expected to be the least vulnerable to macroeconomic risks facing Indian equity, such as rupee depreciation and rising bond yields,” says Dhananjay Sinha, managing director and chief strategist, JM Financial Institutional Equities.

“A depreciation in the rupee against the dollar and other major currencies may boost IT company’s rupee revenue, making it easier for them to absorb the recent rise in operating costs,” adds Sinha.  

Others are betting on faster revenue and profit growth from the tech sector, at a time when there is a huge uncertainty about the earnings growth of other key sectors.

“All leading indicators suggest the IT companies will deliver a strong double-digit growth in earnings in the second half of FY22 on the back of a strong order book. This makes them the top picks for investors in the current market,” says Shailendra Kumar, chief investment officer, Narnolia Securities.

Brokerages also expect IT companies to see margin expansion in the forthcoming quarters. “Demand continues to be unbelievably strong. This quarter, even furloughs are likely to remain low. Price hikes will start showing up in earnings before interest and tax in the third quarter itself,” write analysts at Edelweiss Securities on their outlook on the Indian IT sector.