IT Stocks – What has helped Indian IT stocks sustain their magic in markets

it IT Stocks   What has helped Indian IT stocks sustain their magic in markets

Ask any long-only institutional investor and they would tell you that the one sector they would bet their lives on would be IT. What is it about the Indian IT stocks that makes them special?

Flattering results, once again

If you consider the big-4 IT players, TCS, Infosys and Wipro have announced their Q4 and full year results. HCL Tech will announce next week. In all 3 cases, the top line growth was in the range of 3-7% yoy while profits were up sharply on the back of cost control measures. The pandemic has forced IT companies to tighten their belts and focus on large value customers. That is evident in the profit growth as also in the OPMs well above 20% for Wipro and around 25% for TCS and Infy. This, despite warnings of fall in tech spending in year 2020.

Rewarding shareholders

The one thing that IT companies have managed to do much better than other sectors in India is rewarding owners of these companies. Look at any of the big IT companies and they have distributed a big chunk of their cash flows to their shareholders. This was done either via dividends or the more popular buyback method. All the IT companies have done 3 buybacks in the last 5 years ensuring that the loyal shareholders are rewarded handsomely. However, capital rewards is one side of the story. There is a more fundamental case behind the IT story.

Latching on to opportunities

The one thing the IT sector has done very well is to be ahead of the curve in latching on to opportunities. The big outsourcing boom started in the late eighties but the first big evidence of the execution capabilities came with the ERP implementation in the mid-90s. This was followed by the Y2K opportunity in 1999 and most IT companies made their business model more receptive in the post IT crash scenario. Again, over the years, these IT companies were ready to latch on to the solutions approach post Y2K and finally readied for the big digital push in the last 10 years. To that extent, these IT companies have been quick to latch on to opportunities.

Adaptability was the key

Like the famous theory of the survival of the most adaptable, the IT industry has shown that penchant. They adapted to the removal of tax breaks in 2000 by focusing on top line. The IT companies also adapted to the visa regulations by shifting to an offshoring model against the original onsite model. When the IT business became tougher due to spend limits and competition, IT companies moved to the deep ROI model with focus on $100 million plus TCV clients. The biggest adaptation was in the way the digital contribution of cloud, AI and analytics has now crossed 40% of their revenues. The value story, perhaps, lies in this amazing flexibility to adapt!

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