Can auto and IT sectors outperform Nifty over next 3 years? This is what Feroze Azeez has to say

Feroze Azeez, Joint CEO, Anand Rathi Wealth, anticipates auto and IT sectors to outperform the Nifty index by 3-4% compounded over the next three years. Despite geopolitical concerns impacting goods exports, IT earnings remain strong, with Nifty IT showing consistent performance. Azeez believes the trade war's overhang on IT is creating an opportunity for growth.

Which is the sector from where the next leadership is going to come in?
Feroze Azeez: It will be very contrarian to say that because I look at larger timeframes because of the nature of the business I am in. If I am looking at three to four years, not three months to six months, I am looking at those sectors which can beat the Nifty by about 3% to 4% compounded over the next three years. Surprisingly, I will count auto and IT in it. IT as a sector is 25-27% lower than its peak. The Nifty IT index has about 10 stocks. Their earnings last year was 10.7% on a constant constituents basis. This quarter, Nifty IT’s earnings are about 10.3%. Earnings are being ignored because of a lot of other ownership changes and the bad news on the geopolitical and external side. Our services export is $36 billion, that is not getting too impacted. $81 billion of goods export is getting impacted. $15 billion of goods which are exempt from the tariff are not getting impacted. But there is a little overhang of trade war on IT. I personally think, Nifty IT can beat Nifty by about 3% to 4% compounded over three years.

Really? When you say IT, you mean pure services or tech as well because a lot of consumption plays have the tech element and they are the ones where leadership is?
Feroze Azeez: There are some new-age tech consumption stocks even in Nifty. But in Nifty IT, there is no representation yet. Either way if you are speaking about those stocks which are new-gen stocks, which are part of Nifty, I personally think those which are not profitable businesses today and use IT platforms for their business, are not at all earnings plays. That is why you see such high beta there. Now, Eternal became a part of Nifty last year. Once it becomes a part of Nifty with 1.86% weight, EPFO has 8 lakh crores or 7 lakh crores in Nifty. So, 1.8% weight of 7 lakh crores is a straight Rs 15,000 crore.

So, what happens is when large stocks get listed, they suddenly come into these indices and the first flow comes from passive. Then the entire threshold resistance has been breached. First the trader comes, then the active fund manager tries to create a retrospective story that I am missing out but there is some case here. Actually, there is no case from a profitability standpoint. It is a vicious cycle of passive flows. As soon as you get listed, after six months most of the indices do a review and as you suddenly come into the industry or the listed space, you will suddenly get a weight according to your size.

Tomorrow if the NSDL IPO gets listed, it is not a part of the NSE capital market index which Motilal Oswal formed. But once it is listed, it will come into that index. HDFC AMC is the largest stock. It might become the third, fourth largest stock. So, a lot of money needs to be moved from other 15 or 14 Nifty capital market stocks to NSDL. The market is missing this phenomena and that is why when so many businesses get listed, they get an impetus from passive funds and the trader sees all the charts and says oh, there is a flag pattern and it is time to enter it. The fund manager then says what did I miss and tries to create a report; the sell side analyst justifies those valuations rather than searching for valuations beforehand.