Tata Mutual Fund: IT spending narrative remains strong, says Tata Mutual Fund’s Meeta Shetty

What happens to IT funds? You can hear this question a lot these days. May investors, especially new ones, started to bet on these schemes dedicated to the technology sector, during the covid years. Shivani Bazaz from ETMutulFunds contacted Meeta Shetty, Principal Analyst and Fund Manager, Tata Mutual Fund, to find out what’s happening in the sector and what to expect for investors. “The IT sector has seen a strong recovery from covid and has been one of the best performing sectors. The sector has also seen a significant revaluation thanks to strong growth prospects for the sector,” Shetty said.
Interview edited.

What happened to the tech sector? Investors in IT funds are asking themselves this question these days. Simply put, why are these programs broken?
The IT sector has seen a strong recovery post covid and has been one of the best performing sectors. The sector has also seen a significant revaluation thanks to strong growth prospects for the sector. India’s IT sector growth was in the single digits between fiscal 2017 and 2020, but is now experiencing strong double-digit growth since the pandemic. Over the past few months, however, we are seeing some consolidation in the sector and the sector has been in a tight range for the past six months. The sector has always been a marginal outperformer compared to the broader markets over the same period.

Tech funds became investor favorites in the covid years as the sector was expected to benefit from the online transition. Was it a false promise?
The IT spending narrative remains strong and can be seen in earnings and commentary from global IT services majors. Technology spending on data from major global banks also validates the industry’s strong growth momentum. The BFSI sector is the largest technology spender in the world with a share of around 40% of spending on IT services, making it a good indicator of the outlook. The growth of cloud providers also remains strong, which is another leading indicator of growth in spending on IT services. Overall, we see no signs of slowing down, but global issues such as rising interest rates, rising inflation and geopolitical scenario continue to worsen, this may lead to delays or spending cuts in the future.

IT funds have become evergreen funds as these schemes have shown consistent returns. What is the outlook for the sector?
The pandemic has brought to the fore the need to go digital. Digital adoption has surged and is expected to remain high for the next few years. Leading market research organizations expect global IT spending to grow at ~8% CAGR for the next 3 years from ~4% growth in the years before the pandemic. India has the largest base of quality IT talent in the world and overseas-based companies have the best access to this talent. Additionally, deep expertise, presence in technologies such as cloud and digital across multiple domains and best-in-class execution make India well-suited to enable holistic digital transformation for clients. Hence, the Indian IT industry has witnessed a growth multiplier of around 1.3 to 1.5 times compared to the global market in the past.

Many new investors have bet on IT funds. What is your advice for them?
Looking to the future, we see the world becoming more digitized over the next few years and, in turn, providing growth opportunities for the Indian IT sector. We also foresee plenty of native opportunities in the form of new business models and segments, as India is just on the cusp of technological transformation. But the sector has also seen a significant revaluation and is trading at a significant premium to its 10-year average.

Tata Digital India Fund is among the best in the technology sector. What is your strategy?
The strategy is to have a healthy mix of stable compounds and alpha-generating opportunities based on growth and value. There may be times when the portfolio may be skewed towards one or the other of the tranches, depending on the outlook and valuations. During the pandemic era, we saw alpha opportunities in the small space and began to position ourselves accordingly. As these opportunities turned out well, it didn’t just help us generate alpha for our investors.

Dolores W. Simon