HDFC MF has launched its Technology Fund amidst near term uncertainties around growth prospects. Balakumar says near term cloudy outlook for Indian IT sector (which is already baked into market prices) should not distract us from the 5-10 year growth story which will be driven by 3 catalysts:(1) Increasing tech-intensity in our daily lives (2) 3x larger availability of skilled workforce in India and (3) Huge domestic growth runway for e-commerce.
The IT sector trades at 25x 1 yr forward earnings and EPS growth projected is around 14%, giving a PEG of close to 2 – which looks optically expensive. Balakumar argues however that this sector over the last 10years has traded at a PEG of close to 2, given the rich quality of businesses you find in this sector. While not attractively valued, the sector is fairly valued relative to its 10 yr history.
Companies focused on the India digitization story have strong growth runways ahead. Within the broad IT services segment, some verticals/customer segments are showing lot more resilience than others – and that’s where Balakumar will be focusing on. Fund will be market cap agnostic and will look at the most promising growth opportunities within the theme that are available at reasonable valuations.
Upto 20% of the fund’s corpus can be invested in overseas tech stocks – provided the current caps are lifted and provided overseas tech stocks offer relatively more attractive opportunities.
From a near term perspective, the sector behaves like a global cyclical as it is very heavily exposed to global GDP growth trends. But when you zoom out to a 5-10 year horizon, Indian IT stocks exhibit strong defensive characteristics with low beta, high cash flows and strong dividends.