Why the Correction in Indian Tech Stocks Should Excite You

In 2021, General Motors and Ford Motor reported very different numbers from Tesla, the electric car company.

GM and Ford closed one factory after another. Their production was stalled for months on end. The shortage of computer chips kept the vehicle assembly lines empty. The traditional carmakers struggled to report profits.

Yet Tesla racked up record sales quarter after quarter. The trick was in Tesla's ability to rewrite the chips available with it and update the software remotely.

Larger auto companies couldn't do that because they relied on outside suppliers for much of their software and computing expertise. In many cases, automakers also relied on these suppliers to deal with chip manufacturers. When the crisis hit, the automakers lacked bargaining clout.

Tesla may not be the best example of the game changing impact of technology on businesses. But its stock price until December 2021 was the topic of front page news, memes, and investor conferences for whole of last year.

And it's not just Tesla or electric vehicles that have captured the imagination of investors.

Robotics, artificial intelligence, blockchain etc have become part of the regular investment vocabulary for some time now.

And companies of all sizes are swiftly adapting to the narrative of being tech oriented.

For instance a small manufacturing company in Maharashtra has been making metal hinges for nearly three decades.

When I spoke to the company's management recently, they narrated how the Covid situation had brought them to the brink of shutdown. With workers leaving for their hometown, the company struggled to fulfil orders in 2020.

The compulsion to rely on technology forced them to hire its first robot employee.

You read that right. The company slowly started to use robotics in its factories. But instead of bearing the huge cost of buying the robots, it could hire them from a startup. That too at one fifth the cost.

The robot employees helped the company overcome the temporary labour shortage. But they also helped improve efficiency.

The company emerged far more profitable and tech savvy on the other side of the pandemic.

This technology, whether naturally adopted or forced, has been an essential gamechanger in companies world over.

In some cases, companies adopted technology due to the lockdowns. In other cases, environmental issues stoked its adoption like electric vehicles.

But it won't be appropriate to conclude that tech stocks were missing from the scene all this while. One look at the components of the US S&P 500 will tell you why.

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Banks, oil and gas, and telecom giants ruled the S&P 500 index a decade ago. Similar was the case with global indices.

Today, seven of the ten most valuable companies globally are now based on the 'platform' business model.

These are nothing but digital communities and marketplaces that allow different groups to interact and transact.

Companies like Apple, Google, Amazon, and Alibaba have used this model to grow exponentially and grab significant market share from established firms.

What has been the impact on stock markets?

After a terrific seven-year run, the Nasdaq index has tripled in value. In comparison, the US Dow Jones has only risen by 50%.

In India, the BSE IT index has quadrupled whereas the Sensex doubled in the same time period.

So, technology stocks have cornered a huge share of wealth creation since 2015. Indian stock markets did not see the tech frenzy until March 2020.

But 2021 signalled a big change in attitude towards tech stocks with the IPO of Zomato. As Indian markets welcomed the debut of tech startups on the bourses, investors flocked to businesses of all kinds. Losses, cash burn or capital allocation did not really matter.

Even clear warnings on IPOs of companies like Paytm got no heed.

No one wanted to know its true value. Everyone looked for the next Alphabet, Amazon, Meta, and Tesla.

Come 2022, the so-called moats of companies like Netflix is beginning to wear off.

The fear of US Fed rate hike has forced investors to be wary of the astronomical valuations of these stocks.

In India, Paytm may have been the first tech stock to lose 50% of its post listing marketcap. But many other tech stocks have followed on its close heels. These new age tech startups are soon turning into untouchables.

I believe, long term investors have a lot to get excited about this correction in tech stocks.

Primarily for three reasons:

The flow of talent to tech startups will slow to a trickle. Legacy companies with strong fundamentals and sensible strategies have seeing an exodus of good tech talent.

They have struggled to attract younger generations of tech savvy managers and executives. After the crash, traditional companies which are undergoing digital transformation will find it easier to hire tech talent.

The exit of many digital disruptors will create space for incumbents to become the disruptors themselves.Smart tech-oriented businesses which are already offering niche digital solutions can quickly and effectively adapt to the upcoming market turbulence.

The digitization of the economy is not going away. So, a correction in the market will make few tech incumbents more attractive to investors.

Stay tuned to know which tech stocks interest me in this market correction...

Warm regards,


Tanushree Banerjee
Editor, StockSelect
Equitymaster Agora Research Private Limited (Research Analyst)