Manager Speak - Anil Sarin, fund manager, Birla IT Fund
What is your outlook on the sector?
We are cautiously optimistic. In the short term, stocks will remain choppy as people could move out of these as the results have been a shade below expectations. The money has already been made in IT stocks, so we could see profit-booking. However, the increase in volumes, employees and clients indicate that longer term growth prospects for software companies are brighter.
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Based on your outlook, what is your investment strategy? Given that the stocks are likely to be volatile in the short term, are you looking to increase your cash allocation?
We don't want to reveal what we plan to do right now. But fine-tuning your investment strategy based on short-term views can turn counter-productive. At the same time, given that the sector is highly volatile, we cannot afford to stick to a dogmatic investment approach.
So, we always try to balance both these factors. At present, the outlook is not as negative as it was in August 2001 when we hiked our cash allocation. Going by the increasing volumes and investments made by companies, they should do well in the next fiscal. Given the growth prospects, the valuations also don't look very demanding.
Most fund managers stay away from second rung companies stating that they are risky. What's your view?
The general perception is that investing in second and third-rung companies is risky. This argument holds good for second and third-rung companies who are also-rans in their segment. Growth for these companies will be an uphill task. However, companies which provide niche services and products are definitely worth a look. I-flex, Subex Systems and Fortune Informatics are some second-rung companies that have been doing well.
Due to the nature of their businesses, these companies could see some volatility in earnings and that could impact their stock prices. In the long term, returns are normalised and they can offer significant gains.