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Stocks in the information technology sector are considered defensives in the Indian stock market given their regular dividend payouts and predictable revenue growth. They have been bagging deals, riding on digital transformation.
One of the biggest draws for investors in IT companies is their relatively high-margin business. The weakening of the rupee also adds to their margins as they earn a majority of their revenue in dollars.
Over the past 10 years, the BSE Tech TRI has delivered a CAGR return of 11 per cent while the Nifty 50 TRI gained 10 per cent.
Five schemes invest primarily in IT and IT-related companies. While ICICI Prudential Technology, SBI Technology Opportunities, Franklin India Technology and Tata Digital India allocate their corpus mainly in core IT and IT-related companies, Aditya Birla Sun Life Digital India invests in media and telecom-related companies, too.
Performance
The past year has been muted for IT sector funds, which delivered a negative return of 3-5 per cent, barring SBI Technology Opportunities which beat its benchmark, the S&P BSE TECk TRI. The concentration of holdings in a few stocks such as TCS, Infosys and HCL Technologies is one of the reasons for the underperformance of the funds. However, the performance of the category over the long run has been notable. Over the past three, five and 10 years, the IT sector funds category has delivered a CAGR of 14 per cent, 9 per cent and 14 per cent, respectively.
In the past 10 years, ICICI Pru Technology has outperformed its peers by delivering a CAGR of 17.1 per cent, followed by Franklin India Technology and AB SL Digital India that posted 12.9 per cent and 11.9 per cent, respectively. Sector funds are concentrated bets, going through highly rewarding phases, followed by prolonged rough patches. They are suitable for investors with a high risk appetite and necessary knowledge to time entry and exit.
Concentrated bet
Looking at the recent portfolio of IT sector schemes, all of them hold a concentrated bet, especially in three stocks — Tata Consultancy Services, Infosys and HCL Technologies — with an exposure of 42-59 per cent of their portfolio. As of August 2019, at least one-fourth of the portfolio assets of all the five schemes were held in Infosys.
ICICI Pru Technology held the highest allocation (44 per cent) followed by SBI Technology Opportunities (37 per cent) and Tata Digital India (33 per cent).
ABSL Digital India, SBI Technology Opportunities and Tata Digital India held more than 12 per cent in TCS.
Infosys, TCS and HCL Tech have been bagging large deals in the past few quarters. This has increased the revenue visibility for these companies.
Digital is starting to form a larger proportion of their revenues, showing that they are finally able to manage the transition from IT services business and improve their digital capabilities.