IT - Software

What are IT Stocks?

Information Technology (IT) stocks are shares of companies primarily focused on providing IT services, products, and infrastructure to their customers. The industry, which started to make its foundation in the 1980s, has grown into a billion-dollar industry today and continues to outshine all other sectors. In just 2022, the sector added 4.5 lakh new jobs and now employs a collective of 50+ lakh employees in India.

IT stocks are the safest investment in stocks and are preferred by traders and investors since they have performed very well in the past. From an investment point of view, the top IT companies have negligible or no debt, enjoy the highest profits in any sector and give a strong return to investors. The ROE for IT stocks ranges between 20%-30%, while the biggest stocks also give their shareholders annual dividends.

IT companies are also known to conduct share buybacks to give back money to shareholders, making it a lucrative option for long-term holding. Investors should assess the frequency of dividends and look at the previous buybacks that the company has conducted to assess how well it can maintain its cash to expense ratio and its growth opportunities in the future.

Future of IT Sector Stocks?

Information Technology (IT) sector is one of the top contributors to India's GDP (7.7% in 2020) and the most significant driver of export revenue in India. In FY'22, the IT sector will become a USD 227 billion industry, registering a growth of 15.5%, the highest in over a decade. According to NASSCOM, the IT sector can reach USD 250 billion in revenues by 2026 and is poised for solid growth in the future.

The sector has also held its position despite the volatility in the market following the COVID-19 pandemic. During this stage, IT stocks were stable and were the significant contributors to the rise of the stock exchange to break all previous records. During the onset of COVID-19, IT infrastructure and services were the key enablers for the 'work from home' or remote working model. Today's increasing focus on digitization will only help propel this sector to greater heights.

The pandemic highlighted efficient IT infrastructure and accelerated the global push towards digitization from governments to private organizations. These factors provide a promising future for the IT industry. Given its massive size and access to talent and resources, the Indian IT sector can significantly benefit from the global rise in technology-led growth. 

Is It Worth Investing in IT Stocks?

Given the numbers and growth prospects in the industry, IT sector stocks are poised for growth over the next two three years or more. With disruptive technologies such as Big Data, Cloud Computing, Data Analytics, Artificial Intelligence, and others also contributing to its growth, Indian IT companies can expect solid growth in the domestic and international market, its major revenue generator. 

Indian IT companies generate vast earnings from foreign markets and thus earn in foreign currencies. This focus on foreign markets has helped it generate high revenues, and the companies have significantly benefited from the depreciation of the rupee that occurred in 2013. However, the focus on the foreign market also comes with a risk. IT share price heavily depends on the US and other prime markets, making it highly volatile and fluctuating.

As per risk appetite, the top IT sector stocks are ideal for those who want a safe long term investment option and are ready to take on the slight volatility that the market may experience. Individuals planning to invest in the IT sector through shares or mutual funds must ensure that their funds are appropriately allocated and well-diversified. Instead of putting all your eggs in one basket, it is always recommended to spread it out into multiple sectors.