IT good for next 2 yrs; forget metals: S Naren | Economic Times

IT values are too high for comfort of value investors but growth investors are enjoying the sector now, says S Naren, CIO, ICICI Prudential AMCThe biggest outperforming sector in this bull market in a sense has been IT. IT stocks are trading at record highs, PE multiples are also at record high. Do you think IT stocks are now fully priced in?To a value contrarian investor like me, they are fully priced in, particularly the small caps and midcaps which have seen record moves. The largecaps are almost fully priced in. Having said that, the near term outlook looks fantastic and what Covid taught the western world is that you can sit out of home in any part of the world, in Hyderabad or Pune to do software coding. Covid taught the western world that one can create software and do software projects from anywhere in the world, even in India and that has given a big boost to software projects and the Indian IT companies are the best. We have created a superb near term acceleration of growth and till the near term acceleration of growth continues, irrespective of whether you are value contrarian investor like me or growth investors like many of my colleagues, near term is really good but in the medium term, at some point of time, the growth will slow down. At that point, the valuations will come down. But I would say that Indian companies in this sector have made use of the opportunity in a superb way to capitalise on the entire growth opportunity of digitisation and digitalisation. Every opportunity they have capitalised. They have made use of WFH. Four-five years back, people used to worry about automation or coding. All those issues have been trashed. So I would say that for the next two years, the growth opportunity looks fantastic.Also Read: Investor greed is the biggest problem; they don't recognise risk Many of these companies today trade at 40 times trailing and that means you have given 40 years multiple anyway. That is where the issue comes for a more value oriented investor like me. But many of the growth oriented investors in my team are enjoying the sector at this point of time. Metal in the near term looks solid. There is a huge change in terms of how ESG compliance will impact production and future capacities. What is the right way of looking at a sector like metals?The only advantage is most of the people did not capitalise on the sector and as a mutual fund, we were one of the few people who in our greed fear model managed to capitalise on the sector. So is it a time to buy the sector? Certainly not in my framework because the sector has done extremely well but given that we actually capitalised it on the sector, we are now looking at what is the right time to cut our exposure in the sector. We have debates but clearly the time to buy is over. But whether it is the time to sell is the question. This boom can go on as due to climate change and various other things, supply has stopped in so many commodities and that has resulted in bigger rallies in many of the commodities. So while the time to buy is over, when is to trim/ sell is the debate we are having within the team. Most people had missed the sector because they thought that without metals auto can be made, consumer durables can be made and that there is a world without metals. I found that very surprising a year or year and a half back and that our greed and fear model helped us to buy stocks at unbelievable valuation. But I would urge people to be cautious making new investments in the sector. Autos in general have been underperformers but the EV space is getting rerated. What is the right way of looking at auto sector where disruption will change the terminal value or this downturn is more like a fear?It is a very interesting sector. So many IT engineers are getting salaries which are higher than before. There is so much attrition and as people get higher salaries, they are going to buy better automobiles. The sector has faced so many issues because of semiconductor problems. Then there are issues because of metal prices going through the roof, then there were issues with closed dealerships because of Covid. What most of my colleagues believe in and I support their view is that this is a sector where there has to be a cyclical rally in areas like two-wheelers. The EV disruption eventually will lead to some of the companies actually coming up with good products which in turn can lead to more and more companies getting products in the EV space. Given that we have a long history of good talent in these areas, maybe some of the Indian companies can come and present themselves as good EV/ two-wheeler companies and the sector can get significantly rerated. It is a sector where unlike all the other sectors, valuations are really attractive relative to the past. We have had five years of zero returns virtually in many sectors. We got lots of opportunities and despite the move in the last one month, the sector is really interesting. We have been continuously looking at that sector over the last five years. I believe it looks like a contrarian value and special situation at this point of time in different ways. One cannot have a situation where many IT engineers are getting 50% higher and they will not buy a car or they will not buy a good EV two-wheeler. All of them will do it and I hope that at the bottom of the pyramid in India, the income improves so that they start buying two wheelers. For the industry, we see a good medium term uptick.