Silver Lining: Why IT stocks can be one of the top performers in 2023

Experts have predicted a gloomy and grim future for the IT sector in 2023. However, it has done remarkably well despite such predictions. Not only have Indian IT companies performed well on the stock market, but the NASDAQ has also outperformed the S&P500 and DOW, something which was not seen in 2022.

A question arises as to why IT companies have done well despite the fear of a recession and a potential downturn in the US and Europe. Has the market overlooked some important detail, or is this just a temporary surge?

Setting the scene for IT sector success in 2023
All of India's leading IT firms have reported higher margins for the December 2022 quarter compared to the September 2022 quarter, a strong indication of their robust performance. In fact, companies such as Infosys have revised their projections from 15-16% to 16-16.5%. TCS has publicly stated that their margins for March 2023 quarter would be superior to their December 2022 quarter. Therefore, it is evident that the performance of IT companies is robust. However, the one factor that was holding back the valuation of IT companies was the high attrition rate.

A change in attrition rates
Across all companies, the attrition rate has been seen to decrease. This is a positive trend, and every IT company has expressed its confidence that it will continue to decline.

IT companies used to hire more people than were necessary for a given job because there was a possibility of their employees moving on. This raised their employee costs significantly. However, as attrition has begun to slow, companies no longer need to hire more than needed. This helps grow their margins. In addition, the depreciation of the rupee against the dollar has allowed IT companies to increase their margin by 40-70 basis points. Finally, they have been able to renegotiate better deals with their customers, which will further help them to improve and expand the margins.

The decrease in attrition rate will provide a much-needed boost to businesses and help them improve their overall efficiency and productivity while reducing their costs. It will also help companies retain valuable talent and experience, allowing them to better compete in their respective industries.

The impact of a risk-on strategy
The Indian IT sector is on the brink of experiencing great growth due to its attractive valuation. The last 12 months have been quite challenging for the IT companies, with the share prices going down, yet reporting an increase in earnings. This has resulted in a double-digit growth in the bottom line and making it more attractive to potential investors. Therefore, we are confident that the Indian IT sector will experience tremendous growth in the near future.
It appears unlikely that IT budgets will be subject to substantial cuts, as IT spending is no longer seen as discretionary but as a necessity. If the US and Europe experience a “soft landing”, cost optimization and efficiency improvement will become more critical, which could be beneficial for Indian IT companies.

The future outlook for Indian IT companies
The global scene has been undergoing positive changes lately and this has enabled a resurgence of the risk-on strategy. Consequently, the IT sector has benefited from this, experiencing a significant increase in performance. The trend is maintained due to the consensus that interest rates are likely to peak or have already peaked, which has encouraged investors to adopt more risk-on approaches. This should ensure that the IT sector is one of the top performers in 2023.

(The author is Chief Investment Officer, MarketsMojo)

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)