IT index is down 26%
There is a stark difference between the banking index and the IT index. While the Nifty is flat for the year, the banking index is up 15% and the IT index is down 26%. The difference between IT and banks is almost 40%. Hiren Ved explained that what we are seeing is ‘sector rotation’. For the past two years, the banking sector did not do well and is now catching up. Earlier the Tech sector had done well because it got a massive tailwind from digitisation.
Now the tech sector is down due to fears of recession and slowdown in tech spending.
Recession is a boon for outsourcing companies
However, the recession could be a boom because spending is cut back and outsourcing is increased. Outsourcing is the way to structurally cut costs.
“My sense is that the labour problems or the labour shortages or the cost of labour problems that we are seeing in the US and European countries is only going to exacerbate because they have been made lazy by giving them free money. Nobody wants to work. So there is a slowdown, there is maybe a mild recession and then when the economy needs to pick up, where is the skilled labour available?,” he said.
He emphasized that in the period from 2008-09 till 2021, India’s market share in IT off-shoring has gone from 6% to 15%.
Hiren accepted that the tech stocks may not deliver for the next two quarters. However, this is not a cause for concern. “Who cares? I do not buy for two quarters, I buy for multiple years. One never makes big money by thinking about six months and one year,” he stated.
Buy the smaller & specialised companies in software engineering
Hiren confirmed that his fund continues to be invested in tech though in IT services, it has moved from the largecaps to specialised companies which structurally are growing faster.
He explained that some of the obvious picks are names like Tata Elxsi, KPIT, Persistent and others.
“The big companies will probably see a slowdown in growth and that is okay. They will return shareholders more dividends and buybacks and that is how the returns are going to come from the largecaps. Structurally, it is the smaller, specialised companies in software which will grow,” he stated.
Very bullish on manufacturing stocks like Divi’s, Syngene and Sundaram Fasteners
Hiren pointed out that he is bullish on speciality chemicals and API stocks like Divi’s and Syngene. He explained that Syngene, apart from contract research, is now getting into contract manufacturing in biologics. That has been India’s traditional strength.
He is also bullish on engineering or auto ancillaries stocks like Sundaram Fasteners which is purely into auto and very largely in heavy commercial vehicles. They are doing heavy commercial vehicles but they also have a large non-auto business. They do fasteners. They have already started doing parts for electric vehicle manufacturers. They have engineering skills, manufacturing skills and they will use those skills in defence and wherever there is growth, he stated.