Tech funds run into rough weather in CY22, IT firms' stocks do well

Indian IT services sector is expected to benefit from digital transformation, particularly aided by cloud adoption.

Technology funds are among the worst performers in sectoral funds this year, with returns of -15.5 per cent, according to data from Value Research.

Information Technology (IT) stocks corrected in a relatively strong demand environment and robust revenue growth guidance. Correction has been driven by increase in interest rates, fears of recession in key client geographies and risk to margins.

IT bellwethers TCS, Infosys and Wipro have shed 15 per cent, 25 per cent and 36 per cent.

According to analysts, the Indian IT services sector would continue to benefit from the ongoing digital transformation, particularly aided by cloud adoption. The pace of the journey and funding mechanism, however, will depend on the health of the client.

"In a bad economic environment, clients may either elongate the journey of transformation or create funding through greater cost takeout (including consolidation decisions). This has an impact on the growth rate. We expect IT spending intensity to increase but growth in spending is a function of client health and economic environment. IT companies that have strong transformational capabilities will gain share, while others may struggle," said a recent note by Kotak Institutional Equities.

"Although we still expect the low penetration levels of public clouds (<30 per cent) and rising penetration of managed services in cloud adoption would continue in the medium term, we think near term macro headwinds driven by sharp rise in interest rates by central banks across the globe to tame sticky high inflation, falling consumer sentiment and cuts in GDP estimates do pose a risk to the continuation of sharp growth rates witnessed in FY21-22," added a Nomura report.

Pharma funds are the next worst performers this year with returns of -14 per cent followed by Infrastructure funds with returns of -7.5 per cent and banking at -5.1 per cent.