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Nifty IT Index: An Index Full Of Consistent Compounders

by Tavaga Invest
Nifty IT Index

By: Tavaga Research

IT industry is an integral part of the Indian economy contributing nearly 8% of the nation’s GDP and employs nearly 4.3 million people. Due to the low costs of resources, we have become the largest sourcing destination in the world and have secured a 38% share in the ‘Business Process Management’ (BPM) sourcing market globally. Out of the Total IT exports from India, the US accounts for ~62% and the UK for ~17% of the share.

A stock index is a basket of stocks that represents a particular classification. For E.g., the ‘Bank NIFTY’ or the ‘NIFTY Bank‘ Index is a basket of 12 banks that represent the Banking Industry. Similarly, for the IT industry, we have the ‘NIFTY IT’ Index.

What is the NIFTY IT index?

NIFTY IT Index represents the ever-growing IT industry in India and comprises 10 listed stocks. This is a free-float market cap index with a base date of Jan 1, 1996, and a base value of 1000 which was later on revised to 100 on May 28, 2004.

This sectoral index is meant to reflect the performance of major companies in activities like IT and network infrastructure, hardware and software development, IT training and education, related support and maintenance, etc.

Major eligibility conditions to be fulfilled by constituents of the NIFTY IT Index are as follows:

  1. IT Industry – Of course, the stocks have to be in the IT business
  2. Market CapThe 10 stocks have to be primarily a part of NIFTY 500.
  3. Background Check – Minimum listing history of 6 months. Except for IPOs, it can be lowered to 3 months.
  4. LiquidityTrading frequency > 90% in the past 6 months

Once these criteria are fulfilled stocks are selected based on their free-float market capitalization such that no single stock exceeds 33% weight and no 3 stocks exceed 62% at the time of rebalancing which is done semi-annually on Jan 31 and July 31.

What is the Nifty IT Index share price?

The share price is a term we can associate with a single stock. As the name suggests, an Index is not a stock but a basket of stocks and hence has no share price. But it does have an index value that represents the sector performance as a whole.

This value for the ‘NIFTY IT’ Index is based on a free-float methodology which simply means weighing each constituent based on their Market Cap available in the market for regular investors i.e. excluding shares that are locked-in, such as those held by promoters.

NIFTY IT index has been a high growing index. The Past 10 years return is shown below:

Nifty IT 10Y Performance
Source: Tavaga Research

How has the Nifty IT index performed against the Nifty 50 index?

Source: Google Finance, Tavaga Research

Since the Nifty IT index was launched, both the indices, namely the Nifty 50 and the Nifty IT index have moved in sync. However, when we compare the recent performance (post lockdown), the IT index has managed to beat the Nifty 50 returns.

What are the constituents and weightage of the Nifty IT index?

Stocks of these 10 companies currently constitute this Index and form the major chunk of the entire IT industry:

Constituent Company Weightage
Tata Consultancy Services 28%
Infosys 26%
Wipro 10%
Tech Mahindra 9%
HCL Technologies 9%
Info Edge (India) 8%
Larsen & Toubro Infotech 4%
MphasiS 3%
Mindtree 2%
Coforge 1%
Total 100%

Source: NSE Indices, Tavaga Research

Nifty IT: Stocks Weightage
Source: NSE Indices, Tavaga Research

Nifty IT Constituent Stocks

Tata Consultancy Services – TCS started as a division of Tata Sons in1968 and has grown to become the top IT Company by market cap in India. Being globally renowned for digital and business solutions and IT services, as well as the biggest name in India for IT Outsourcing, TCS employs 394,000+ consultants in 46 countries.

Infosys – Having more than 37 years of experience in the IT industry with 13 global subsidiaries and 200,000 + employees around the world, Infosys has a significant global presence. Infosys is not just listed on the Indian Stock Exchanges like BSE / NSE but is also listed on NYSE and NASDAQ.

Wipro – Established in 1945, WIPRO is one of the oldest IT companies we have here. With 170,000 + employees and a client base spread across 6 continents, it is a strong player.

Tech Mahindra – Tech Mahindra began as a Joint Venture between Mahindra & Mahindra group and British Telecom in 1986 (British telecom completely exited by 2012). It has 125,000 + employees spread across 90 countries

HCL Technologies – HCL technologies began as the R&D division of the HCL enterprise which later became an independent IT company in 1991. It has 147,000+ employees and a client base including 250+ companies from the Fortune 500 list.

Info Edge (India) – Unlike others, Info Edge commonly referred to as “Naukri” is a pure-play internet solutions company with its popular platforms like Naukri.com (job portal), 99 Acres.com (real estate platform), Jeevansathi.com (matrimonial), among others.

Larsen & Toubro Infotech – LTI is a subsidiary of Larsen & Toubro which was founded in 1996 and was one of the Top 15 service providers in the world as per Everest Group’s PEAK Matrix for IT service providers in 2017.

MphasiS – Formed in 2000, Mphasis specializes in infrastructure technology, application development and integration, and application management services and architecture guidance. It was acquired by HP (Hewlett-Packard) in 2008 which later sold its majority stake to The Blackstone Group in 2016.

Mindtree – Another subsidiary of Larsen & Toubro (since 2019), Mindtree makes it to this list. It deals in cloud computing, enterprise application integration, and enterprise resource planning, digital transformation, data analytics, etc., and has 40+ offices in over 18 countries.

Coforge – Noida-based Software Company “NIIT Technologies” with 11,000 + employees was rebranded as “Coforge” in 2020.

Financial snapshot (in INR crores)

Financial snapshot of Nifty IT Stocks
Source: Company Data, Tavaga Research | Financials as of FY20

Can an investor buy the Nifty IT index?

We cannot buy the Index itself but we can invest in ETFs and index funds that replicate the NIFTY IT index. Index funds are a portfolio of securities that attempt to replicate the index. ETFs are nothing but a basket of securities that can be bought or sold on an exchange just like we trade stocks.

Unfortunately, there is no index fund that replicates the Nifty IT index. However, there are ETFs that track the Nifty IT index.

Following is a list of a few popular NIFTY IT ETFs:

  1. Nippon India ETF Nifty IT: This was the first fund tracking this index with a launch date of 26 Jun 2020. It had an AUM of 714.43 crores as of 18 Feb 2021.
  2. ICICI Prudential IT ETF: Launched on 17 Aug 2020. It had an AUM of 1,670.81 crores as of 18 Feb 2021.
  3. SBI – ETF IT: Launched on 06 Oct 2020. It had an AUM of 454.64 crores as of 18 Feb 2021.

Major industry events

A few major deals/collaborations among many include:

  • Feb 2020: TCS – Walgreens: TCS bagged USD 1.5Bn worth of contract from Walgreens Boots Alliance (pharma company).
  • Apr 2020: Jio – Facebook: $5.7bn investment in Jio Platforms Limited by Facebook
  • July 2020: Infosys – Vanguard: Infosys secured a USD 1.5 Bn deal from Vanguard (investment management company) to redesign the corporate retirement plan experience for its participants and sponsors.
  • July 2020: HCL Technologies – Ericsson: Infosys secured a USD 600 Mn deal from Ericsson (telecom equipment company) to provide cloud and application services and infrastructure management.
  • Nov 2020: Infosys – Ellen MacArthur Foundation: A partnership to boost the concept of a circular economy, an ESG initiative aimed at reducing waste and pollution and regenerating natural systems.
  • Nov 2020: Wipro – SNP Schneider & Partner SE: A partnership to help customers accelerate their enterprise transformation journey.
  • Nov 2020: TCS – Zoho: A partnership to provide ITSM, CRM, and e-commerce solutions.
  • Jan 2021: TCS – Postbank: TCS acquired 100 percent shares of Postbank Systems AG which was Deutsche Bank’s tech unit, through its subsidiary TCS Netherlands BV at a symbolic transaction value of 1 Euro.

Latest Developments

  • Recognition as a champion sector – The government of India had launched an action plan to promote certain service sectors identified as champions. IT industry is one of those 12 sectors which means greater opportunities for this sector.
  • Increased adoption – While the Pandemic hurt the global markets, it accelerated the digital transformation through concepts like “Work from Home”. This could be a reason why the Indian IT industry performed well even in 2020 and we saw a bunch of deals happening in that space.
  • Up-skilling – NASSCOM through its online platforms is working towards up-skilling IT professionals, students, and prospective employees. This could mean an increase in the availability of the talent pool in the country.
  • Growing exports – IT exports continued to grow at a CAGR of ~8% for the period FY 2016-19. With increased opportunities, favorable government policies, and the low-cost status, it seems to be a good signal in terms of fresh exports.
  • Growing domestic consumption – For computer services, growth in domestic demand is surpassing growth in exports mainly because of the Digital India program being run by the Government of India.

IT industry has been a consistent performer contributing close to 8% of the nation’s GDP and has managed to grow even during the crisis. Even the NIFTY IT Index which represents the top listed companies in terms of market cap grew by more than 50% in 2020. With increased digitization and government support, we could see a high growth trend for the next few years as well.

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