IT stocks will not do well in near to medium term: Srinivas Rao Ravuri

“My concern is coming from the fact that till about a few months back, IT companies used to say that the outlook is very positive for the next one, two, three years. We have seen this commentary changing in the recent times to companies saying they have solid visibility for the next two quarters, not two years,” says Srinivas Rao Ravuri, CIO, PGIM India

India has been an outperformer versus the rest of the world throughout the year. Is this decoupling likely to stay for longer and how are the global investors looking at India?
The Indian markets have clearly outperformed the rest of the region and other markets. This is for a very right reason and I think this premium valuation will continue. It is difficult to say the outperformance in terms of what will happen in one month or three months but I would clearly think that over a medium to long term, this outperformance will continue.

I would say there are three reasons for this outperformance; the first is corporate earnings. We continue to see a very strong corporate earnings growth. The second is relative performance in terms of India doing better than other emerging markets on the economy front.


That is the economy and macro stability, I think the government's focus on macro stability has played out and we as a country stand out in the last seven, eight months or last two years when you see our broader numbers.

The third factor is more on the softer side. India is emerging stronger on softer aspects, the way our political leadership has handled the recent global events and also made sure that India has gained stature globally. That also is attracting more people because historically, given our size in terms of population and GDP, it is a huge market. So, along with a stronger government, it is making more and more people look at India positively.

At a time when everybody thought that bets on the IT sector cannot go wrong, IT has underperformed. What is your view on the sector? Is the worst behind us? Should one start to look at large IT names?
No, I do not think IT will do well in the near to medium term. It is true that in the recent past, IT has done well and that is what the market is all about when everybody thinks that this is where the sector is headed and we see a surprise and that is what we have seen.

The IT sector per se I think will do very well, we are extremely positive on the outlook for the Indian IT industry given the kind of inroads they have made in the global markets; they continue to gain market share and we continue to do well in the emerging areas within the technology space.

So, I am positive on the IT sector but I think we need to differentiate between IT companies doing well in terms of their top line, profit growth versus what is the outlook for the IT sector in the stock market, what are the returns from the stock market and that is where I have a concern.

My concern is essentially coming from the fact that till about a few months back, IT companies used to say that the outlook is very positive for the next one, two, three years and we have clearly seen this commentary changing in the recent times to companies saying that we have solid visibility for the next two quarters, not two years.

What is your call on autos and banks because they have already rallied quite a bit, where do you see it headed from here on?
We are positive on autos and more on the passenger cars and commercial vehicles than the two-wheelers. Just as we are surprised by the resilience of stock markets, we are also surprised by the resilience of auto demand. The month on month numbers in the passenger car and also commercial vehicles continue to surprise. The underlying demand seems to be pretty robust and that makes us positive on the passenger car and commercial vehicle space.

The same applies to bookings new launches are getting. Nobody can deny India’s long-term story even when we have gone through a relatively tough period in the last 12 to 18 months. The demand for passenger vehicles is pretty strong and that is what makes us positive on auto. Coming to financials or banks, we used to be underweight financials for quite some time in the last three years but incrementally we have also turned positive and increased weights of banks in the last two quarters I would say.

Apart from banks, auto, IT, where do your preferences lie? Also, which sectors are you completely avoiding as of now?
One sector that we are liking and overweight on is capital goods including the manufacturing sector. We are going to see a revival in capex spending in the country as manufacturing is finally picking up after a prolonged slowdown.

The kind of initiative that the government has taken to see that manufacturing comes back in the country included initiatives like PLI makes us positive on industrials or capital goods as a sector and we are overweight. Among the sectors we are avoiding, one is metals. We are in extremely turbulent times in terms of what is happening globally, Indian companies have no control on selling price of global commodities and we can see headwinds as we head into a recessionary period. That is where we think it is better to avoid companies that are dependent on global events for their business and their pricing and we are avoiding such companies.