IT stocks may remain favourites despite rising US bond yields, Covid

Indian stock market has given stellar return in last financial year (FY21). This is despite the fact that the Covid pandemic has badly battered the Indian economy. For the fiscal year ended March 2021, while benchmark Nifty rose over 71 per cent, Sensex rallied over 68 per cent during this period. The rally was fuelled by liquidity and strong buying interest from overseas investors. The foreign portfolio investors (FIIs) invested a record $37 billion in FY21 compared to $1.3 billion investment in Indian equities in the previous fiscal. No wonder, last fiscal year has been the best year for the Indian markets since FY10. This stupendous rally was majorly driven by IT and pharmaceutical sectors apart from contributions from others.

Especially, Indian IT stocks rallied a lot during the last fiscal year. After initial setback last March due to the lockdown, shares of IT companies saw an increased buying interest from investors. This is due to combination of factors. Market realised that like electricity and water, technology-driven solutions have emerged as one of the essentials globally. When majority of the workforce were working from remote locations, internet-enabled solutions became the mainstay to stay connected. Similarly, edtech, medtech, retailtech companies made it easier for people to get their requirements met sans human interfaces. Such rapid digitalisation of enterprises boosted demands for IT services globally with Indian IT companies being its major beneficiaries.

Moreover, the fundamentals of Indian IT companies remain strong. Stable earnings growth, quality management, pipeline of strong deals, and consistent cash flows worked in their favour. Against this backdrop, companies like HCL Technologies, Infosys and Wipro rallied over 100 per cent during this financial year. Even mid-tier companies like L&T Infotech, L&T Technology Services, Coforge had also given good return to investors during this period.

As Indian IT firms are all set to announce their fourth quarterly results with market leader Tata Consultancy Services (TCS) kickstarting the earnings season on March 12, the performance during the quarter and guidance on revenue growth for FY22 will be the key factors to watch out for. After the growth projections of global technology major Accenture, most analysts are optimistic on growth prospects of Indian IT firms. The management of most Indian IT biggies have already commented that double-digit growth in revenues is likely in the current fiscal year.

Amid this air of optimism, the second wave of Covid, however, has to be keenly watched. While India is going through a second wave of the pandemic, situation in many European nations is not that rosy. Also, rising bond yield in US market raises the fear of capital flight from emerging economies. So, the future movement of Indian IT stocks will depend on the outcome of these events. Despite these odds, IT stocks will remain fundamentally strong as technology-enabled solutions make more inroads into our lives.