Can Mid-cap IT outperform yet again?
All about macros!
The Information Technology sector is a crucial sector for the Indian economy and one of the most significant drivers of export revenue for the country in the services sector. However, it has been facing multiple headwinds both at the macro and microeconomic levels. On the demand side, IT companies are facing a global slowdown & on the supply side, they are facing high attrition rates leading to an impact on their profit margin and causing a stock slump.
In October 2021, the IT sector weightage in Nifty 50 enjoyed almost 18% and accounted for 13% of India Inc's net profit and market cap. However, due to the recent underperformance in the past few months, its weightage in the Nifty 50 has come down to ~14.22%.
Since IT companies mostly earn their revenues from developed markets like USA, UK & Europe, here's the graph showing the % of revenues earned by them from America & Europe(including UK)
Goldman Sachs recently came out with a note by a team led by David Kostin saying that while the path of US growth may be “uncertain,” the economic situation in Europe is dire.
“Despite concerns that investors have about the US equity market, we believe it offers greater absolute and risk-adjusted return potential than recession-plagued European markets,” they wrote in a note. Their preference for US exposure comes during what is turning out to be a particularly tough year for businesses in Europe amid a gas crisis, soaring inflation & tightening central-bank policy. This is now getting reflected in the currency market as well, where both Pound & Euro have reached record lows in recent years against the US Dollar & other resilient currencies like Indian Rupee, even though the volatility remains very high.
Here’s a list of IT companies having higher exposure to North America-
Here’s a list of IT companies having relatively higher exposure to Europe + UK-
As we notice, Mid-cap IT companies, in general, have a higher % of revenues coming from the USA, whereas, large-cap IT tends to be more diversified with a significant % of revenues coming from Europe, which is facing a crisis right now.