Nasdaq turns negative for 2021; Indian IT stocks outperform: Here's why

The speculations of the rise in interest rates made tech stocks vulnerable, leading to investors dumping them sooner rather than later on valuation concerns.

The tech-heavy Nasdaq index fell over 2 percent today, extending losses from the previous session. It is down 1 percent in 2021 YTD. Meanwhile, IT stocks in Asia also declined in trade, falling further from their Thursday tumble.

However, the Indian IT stocks outperformed global tech stocks. In 2021 as well, the Nifty IT index has risen over 6 percent as compared to a 7 percent rise in Nifty and a negative Nasdaq.

The rally in Indian IT stocks has been on the back of better than expected December quarter earnings, a strong deal pipeline and increased technology spend. Q3 was the strongest third quarter for the Indian IT industry in the last five years.

The COVID-19 lockdown continued to act as a tailwind on margin in the December quarter, with a higher offshore mix and lower travel expense aiding operating margin.

Deal wins continued to provide upside to Indian IT stocks. Yesterday, a media report stated that Infosys has won a $500 million deal from Google to provide customer experience and engineering support for its product. This led to a percent rise in the stock, in an otherwise weak market.

Wipro also said on Thursday that it would buy privately held British consultancy Capco for $1.45 billion. This is the software company's biggest acquisition so far. London-based Capco serves financial institutions across the Americas, Europe and Asia-Pacific regions, Wipro said in a stock exchange filling.

Wipro said the acquisition will make it one of the largest end-to-end global consulting, technology and transformation service providers to the banking and financial services industry. The acquisition is subject to customary closing conditions and regulatory approvals and is expected to close in the quarter ending June 30, 2021.

Such deals continue to lift the IT space. Herald Van Der Linde, Head-Asia Equity Strategy, in an interview with CNBC-TV18, said that

Going ahead, cloud migration, digital transformation, and user experience are expected to be multi-year opportunities for Indian IT companies. Margins are expected to be range-bound as some costs pertaining to travel, normalisation of utilisations, and wage hikes will now gradually return.

“The outlook for CY21 continues to improve, with an increase in deal TCV and pipeline across companies. Despite valuations running at the upper end of the historical range, MOFSL retains their attractive stance on the sector. Led by robust order book and decent deal conversion, mid-teens growth is expected for the sector in FY22E,” Motilal Oswal said.

Meanwhile, HDFC Securities is also constructive on the entire large-cap IT space, said Apurva Prasad, research analyst–IT at the financial services intermediary.

“We are constructive on the entire large-cap space. There is a lot of market share gains that Infosys has seen, the large deal trajectory, but at the same time, there is a lot of opportunity for a player like HCL Technologies. Therefore, we do like HCL Tech at the same time as Infosys,” Prasad told CNBC-TV18.

Sunil Singhania, founder of Abbakkus Asset Management also likes the IT space as spending on technology is increasing globally and expects the topline and bottom-line performance of these companies to surprise the markets.