The Booming IT Industry is Positive for these Stocks

Aug 10, 2021

Recently, Richa and I were evaluating stocks for the Phase One Alert recommendation service. We spoke to the CEO of a small IT company.

Five minutes in to the conversation, the CEO told us he had a unique problem. A problem which he hasn't encountered since inception of the company.

He exclaimed 'Business is booming like never before' and then paused.

Richa and me looked at each other through our Zoom window and wondered 'How that is a problem'?

Realising our confusion, the CEO clarified...

  • 'While business growth is like never before, employee costs and attrition rates are unbelievably high. It's difficult to execute client commitments on time'.

You see, the benchmark salary of an IT fresher has almost doubled in the last 2 years. The attrition rate in some companies is so high that 20-30% of the team is replaced every year.

You must have read news reports of IT companies rewarding their employees with luxury bikes, hi tech gadgets, watches, and even work from home furniture.

--- Advertisement ---
Investment in securities market are subject to market risks. Read all the related documents carefully before investing

We're Bullish on 2 Non-Nifty Stocks

These two stocks are not in the Nifty50 index today.

But they have a very high chance of entering the index in the coming years.

And our research says as these 2 stocks race towards entering the Nifty50 index... they could potentially offer hundreds of percent in long term returns to investors who buy these stocks today...

See Details Here
Details of our SEBI Research Analyst registration are mentioned on our website - www.equitymaster.com
---------------------------------------------------

A friend who works in an IT company joked, 'Suddenly the HR department has become even more important than the CEO of the company'.

Why are IT employees in high demand right now?

It's because of the big increase in demand for IT services.

So why has demand for IT services increased?

Well, that's because of the convergence of digitalisation, automation, and the success of innumerable technology platforms and apps.

Concepts like cloud storage, IOT (Internet of things), Artificial Intelligence (AI), and Machine Learning (ML) have now come of age.

Companies need skilled talent to write the code for automation, to develop software that tracks what you click online so as to generate ads, to maintain billing details on the cloud space provided by Amazon or Microsoft...and much more.

As the world becomes more connected, the role of Indian IT companies has evolved from outsourcing to becoming a partner in innovation.

So why am I telling you about the IT boom and the problem of wage inflation and attrition?

--- Advertisement ---
Investment in securities market are subject to market risks. Read all the related documents carefully before investing

Up For Grabs

Equitymaster's Small Cap Research At 60% Off

Claim Now
Details of our SEBI Research Analyst registration are mentioned on our website - www.equitymaster.com
---------------------------------------------

Well, the IT sector ticks all the boxes from an investment point of view.

But I want to make a different point here.

India is a consumption driven economy but many sectors are still far away from maturity like consumer goods and automobiles.

The concept of 'spill over' or the 'domino effect' is important when forecasting demand in various sectors, especially consumption driven sectors.

Gone are those days where you had to wait for an occasion to buy your favourite bike or a HD TV set. Millennials are accelerating the spending cycle.

And why not?

The hikes doled out by the IT sector are fast and more than adequate.

Sales of consumer durables, 2-wheelers and entry level cars have a very high correlation to wage hikes and bonuses in the IT industry.

In fact the correlation is so high, sales of 2-wheelers grow linearly with a lag of 3 months from wage hikes.

The rental yields and the real estate market in Bangalore and Pune too will pick up with a lag to wage hikes and bonuses.

Value Stocks: Stocks with Limited Downside but Good Upside Potential

After all the IT industry accounts for 8% of India's GDP which has a multiplier effect on consumption demand.

The reason why I have highlighted the correlation between sectors is to identify early trends and tailwinds for sector growth.

It's important to identify companies which have a strong presence at IT belts. Focus on those which will benefit from the discretionary spending.

Even an incremental rise in disposable incomes would lead to higher sales of goods like air conditioners, washing machines, TVs, 2-wheelers, and entry level cars.

I think these sectors are in a secular phase of growth.

However, the valuations of these stocks have run up in the past one year. The market has already factored in much of the short-term gains.

But the long-term trend in consumption demand is intact.

A meaningful correction in the stock prices of consumer stocks will offer a good opportunity to bet on the long-term consumption story of India.

Warm regards,

Aditya Vora
Aditya Vora
Financial Writer

PS: Join Richa Agarwal, Equitymaster's smallcap expert, online tomorrow at the Super Smallcaps Summit. Richa will talk about the top 3 small-cap stocks in the market today. Grab your free spot now.

Recent Articles

Under Radar Stocks in India's Electronics Revolution March 29, 2024
How India's electronics stocks are riding a huge megatrend.
Stocks that Are Riding the Premiumization Theme March 28, 2024
The common theme among Ethos, Brand Concepts, DLF.
Boring Agri Stock Can Ride the AI Megatrend March 27, 2024
In the constantly evolving world of artificial intelligence (AI), businesses are far more prone to disruption than ever before.
Smallcaps for Election Season, and Beyond March 26, 2024
How to approach smallcap investing during election season.

Equitymaster requests your view! Post a comment on "The Booming IT Industry is Positive for these Stocks". Click here!

2 Responses to "The Booming IT Industry is Positive for these Stocks"

ramesh d

Aug 11, 2021

09746733592

Like 

Kavitha N Veeramani

Aug 10, 2021

Good information as always. Buy for bikes, cars, trucks, buses and auto companies will fall down as the population and the road of India will make the companies share prices going down as per my idea. Or PM on the other hand to take out the only bikes older than 10-15 years and reduce the carbon from them as for truck and buses they had done, but the time is not given for them to take them out from the traffic. Also on accidents on many states high.

Kavitha Veeramani

Like (1)
  
Equitymaster requests your view! Post a comment on "The Booming IT Industry is Positive for these Stocks". Click here!