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WF: What is the key investment argument for an allocation to the tech sector now?
Naren: Due to the recent correction in the valuation multiples of IT companies led by cross currency headwinds, the technology sector looks relatively attractive for investment now. Historically, IT companies have traded at a premium over broader market; as CNX IT Index traded at an average P/E of 19.6x vs Nifty average P/E of 17.5x, a premium of 2.1 over CNX Nifty Index. However, currently the CNX IT Index is trading below its long term average.
We also believe that in the long term Indian IT sector remains a structural growth story owing to low penetration, high cost and low availability of skilled talent in developed markets. NASSCOM expects the Indian IT industry's exports to grow 12-14% in FY2016 in constant currency. In past, it has been witnessed that IT sector growth has closely tracked the NASSCOM estimates.
These factors along with INR depreciation may lead to earning upgrades and therefore post a strong case for investing in technology sector now.
WF: Top line growth among tech majors is challenging now. What is causing the headwinds and what in this context is the case for a structural IT growth story?
Naren: The Indian IT sector corrected 7% in the past one month as concerns emerged over cross currency headwinds impacting US$ revenue growth for two quarters in a row and lacklustre commentary from some Indian IT firms. However, we believe the sector is now pricing in most of the negatives and the outlook for FY16 growth remains positive.
Indian IT services may continue to grow well over the next five years, driven by low penetration, high cost and low availability of skilled talent in developed markets. As per Gartner and NASSCOM estimates, Indian IT exports were less than 10% of overall global IT services spend. For global clients, offshoring to India can offer cost savings of 30-50%. (Data Source: NASSCOM)
Therefore, Indian IT services companies with low cost structure may continue to gain market share. Also, these companies have a consistent track record of expanding into newer areas that are less commoditized, preserving dominant positions.
WF: What is your medium term view on the Rupee and to what extent is the sector relying on a weak Rupee to support its investment case?
Naren: Given that the Rupee is currently overvalued to Dollar in Real Effective Exchange Rate (REER) terms, going forward, moderate depreciation in Rupee cannot be ruled out. The recent Rupee depreciation is not priced in the valuations and if it stabilises at current levels, or depreciates further, it may lead to upgrade in the earnings.
Factors like attractive valuations, conviction in the structural growth story of Indian IT sector, NASSCOM guidance on the sector's growth along with INR depreciation support the investment case for the sector.
WF: How broad or sharply focused is the investment mandate for your Technology Fund? Will you consider e-commerce businesses in this fund?
Naren: The ICICI Prudential Technology Fund follows a bottom-up strategy with high concentration and high conviction.
Most of the e-commerce companies are not listed. However, going forward there lies an investment opportunity as the growth of e-commerce coupled with its status as an emerging theme cannot be overlooked. But one needs to be cautious, as not every e-commerce model may be a success. Therefore, the sustainability of the business model needs rigorous evaluation.
WF: ICICI Prudential Technology Fund has been consistently winning the Lipper fund awards across the 5 years and 10 years category for the past four years, and across the 3 years category for the past two years. What do you attribute this consistent performance to?
Naren: There has been a keen focus on valuations and management of the company. We have equipped a counter cyclical approach i.e. investing when there is a negative view on the sector. Also, we look at companies with above industry average earnings growth.
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
The information contained herein is only for the reading/understanding of the registered Advisors/Distributors. All data/information used in the preparation of this material is specific to a time and may or may not be relevant in future post issuance of this material. ICICI Prudential Asset Management Company Limited (the AMC) takes no responsibility of updating any data/information in this material from time to time. The AMC (including its affiliates), the Fund, ICICI Prudential Trust Limited (the Trust) and any of its officers, directors, personnel and employees, shall not liable for any loss, damage of any nature, including but not limited to direct, indirect, punitive, special, exemplary, consequential, as also any loss of profit in any way arising from the use of this material in any manner.
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