IT stocks are having a dream run powered by a pandemic-driven boom in demand for technology across sectors. Most analysts remain bullish -- betting on strong demand to sustain -- though few have raised concerns over higher expensive valuations.
IT counters have given phenomenal returns over the past few months, with the sectoral gauge beating the headline Nifty50 index as well as Nifty Bank, which tracks shares of 12 major lenders in the country. Some analysts believe the high valuations in some cases are sustainable in the times to come.
Shrikant Chouhan, Head-Equity Research (Retail) at Kotak Securities, remains bullish on the IT sector citing factors such as the companies’ strong traction in capturing market share and their highest ever deal-wins/pipelines. However, some margin pressure can be there in the near term on account of hiring- and employee retention-related costs.
Here's how the IT pack has fared in the past year:
| Stock/index | Return (%) |
| Nifty50 | 51.4 |
| Nifty Bank | 62.2 |
| Nifty IT | 88.5 |
| TCS | 61.8 |
| Infosys | 78.8 |
| Wipro | 128.6 |
| Tech Mahindra | 86.7 |
| HCL Tech | 67.5 |
| Mindtree | 233.2 |
| LTI | 118.8 |
| Mphasis | 159.2 |
| OFSS | 66.5 |
| Coforge | 148.0 |
"IT appears to be on the cusp of a multi-year upcycle with the share of digital increasing consistently. Industry leaders are upbeat about the prospects of the sector for the next 3-4 years. But stock prices, particularly of midcap IT companies, have run up too much too fast," VK Vijayakumar, Chief Investment Strategist at Geojit Financial Services, told CNBCTV18.com.
His remarks come at a time when TCS, Infosys and now Wipro have announced plans to open their offices for some of their staff. At its peak, the deadly Covid virus had forced many businesses to allow their employees to work from the safety of their homes last year, and others to trim or shut operations.
And here's how some Nifty Bank components have performed:
| Stock | Return (%) |
| SBI | 113.5 |
| ICICI Bank | 90.9 |
| AXIS Bank | 76.3 |
| IndusInd Bank | 63.2 |
| Federal Bank | 58.5 |
| IDFC First | 50.9 |
| HDFC Bank | 44.2 |
| Kotak Mahindra Bank | 38.3 |
| PNB | 11.6 |
| RBL Bank | -5.7 |
| Bandhan Bank | -8.9 |
The current bull run is propelled by IT stocks, in stark contrast to the period between 2015 and 2020, when it was led by banking stocks, mainly private sector ones.
Market veteran Atul Suri said in an interview to CNBC-TV18 that the mantle of leadership has moved away from banking to IT. "The last bull market was very, very representative of banks... Today, if you look at it, it simply seems to be the most overweight position with most funds," he said.
A pickup in earnings from the banking universe can be the much needed tailwind for the banking index. The sector is facing "a transition of sorts" and better financial performances can trigger the banking index to outperform the market.
"Some risks to the book on account of the impact of the pandemic are behind us, however there may be some lagging concerns that may be addressed by the year-end. There is likely to be a change in landscape with fintech companies expanding their presence in traditional banking," said Chouhan, who believes a spike in growth rates will require capex investments, which may be some time away.
On the positive side, he said, the capital ratio remains strong across the board, where large banks are better positioned compared to others.
While some participants are still hoping for a strong comeback in the banking pack, others are happily riding the IT rally for now.
ALSO READ: Can you bank on Bank Nifty now?
"Demand for IT will remain robust while banks are struggling under poor credit offtake and poor asset quality," said Vijayakumar, who finds large private banks more attractive than others from a valuation perspective.
Others are also positive on IT businesses' prospects but cautiously.
AK Prabhakar, Head of Research at IDBI Capital Markets, expects the outperformance in the IT space to continue at least till the onset of the next earnings season. "But anything can change post results and management commentary," he added.
What lies ahead for Covid beneficiaries?
And it is not just IT stocks that are in high demand in the new normal. Spaces such as pharmaceuticals, healthcare, hospitals and even chemicals are also on a tear.
Suri, CEO of portfolio management service Marathon Trends, is also positive on healthcare and pharma stocks thanks to the changes brought about by the pandemic. "If you see broadly, a lot of pharma, healthcare and hospital stocks are doing very well," he said. Read more on what Atul Suri said
| Stock | Return (%) |
| Apollo Hospitals | 194.4 |
| Dr Lal Pathlabs | 126.8 |
| Fortis | 101.3 |
| Divi's | 61.6 |
| Sun Pharma | 54.3 |
| Cadila Healthcare | 50.1 |
| Alkem | 31.8 |
| Cipla | 30.9 |
| IPCA Labs | 28.9 |
| Abbott | 27.1 |
| Pfizer | 25.0 |
| Natco Pharma | 24.9 |
| Dr Reddy's | 12.0 |
| Torrent Pharma | 10.2 |
| Glenmark | 6.9 |
| Lupin | 1.7 |
| Sanofi | -0.5 |
| Aurobindo Pharma | -8.3 |
| Biocon | -18.4 |
| Laurus Labs | -48.7 |
IDBI Capital's Prabhakar told CNBCTV18.com he likes select pharma stocks, and is also positive on scrips of the hospital, IT, new fintech and chemical companies.
In Vijayakumar's view though, the prospect for pharma and healthcare sectors will "diminish slightly once the pandemic is behind us thanks to subdued demand and pricing pressure".
Which stocks can you bank on now?
Chouhan's top IT picks are Infosys, Tech Mahindra and TCS. He is also bullish on SBI, ICICI Bank and HDFC from the financial services space, and Cipla, Sun Pharma and Narayana Health from healthcare.
Prabhakar's favourite largecap IT bets are (in order of preference): TCS, Wipro, Infosys, Tech Mahindra and HCL Tech. From the midcap basket, he likes Cyient, Larsen & Toubro Infotech and L&T Technology Services.
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