From TCS to Infosys, IT stocks jump 2-3% on Accenture’s Q3 results. Is the worst over for tech firms? Experts answer

Many IT stocks, including Infosys, TCS, HCL Tech, Tech Mahindra, and Wipro, jumped 2-3 per cent in early deals on Friday, June 21. This boosted their sectoral index, Nifty IT, a day after global IT giant Accenture announced its May quarter financial results.

Nifty IT index jumped nearly 3 per cent, while the equity benchmark Nifty 50 rose about 0.4 per cent to hit its fresh record high of 23,667.

Around 9:30 am, the Nifty IT index was 2.16 per cent up at 35,690, with all 10 components in the green. Shares of Persistent Systems, LTIMindtree and Coforge were up over 3 per cent each. Nifty 50 was 0.21 per cent up at 23,616 at that time.

As Mint reported, Accenture, on Thursday, reported revenues of $16.5 billion for the period, reflecting a 1 per cent decrease in US dollars but a 1.4 per cent increase in local currency.

Accenture expects revenues for the fourth quarter of fiscal 2024 to be in the range of $16.05 billion to $16.65 billion, or 2 per cent to 6 per cent growth in local currency, reflecting the company’s assumption of an approximately negative 2 per cent foreign-exchange impact compared with the fourth quarter of fiscal 2023.

Read more: Accenture Q3 results: Revenue touches $16.5 billion, cash dividend at $1.29 per share

Why are IT stocks gaining?

Indian IT stocks rose after Accenture's earnings, boosting hopes that the worst was behind and that the sector may see demand revival.

Accenture's earnings are seen as a performance indicator of Indian IT players, and they are keenly observed by IT sector experts and investors. It also indicates the demand for IT services worldwide.

"Accenture maintained FY2024 guidance at the midpoint of 2 per cent with nearly 3 per cent inorganic component. Accenture’s results show a few positive elements, such as strong booking growth and acceleration in year-on-year growth rates. This can lead to elation in Indian IT stocks," said Kotak Institutional Equities (Kotak Securities).

Kotak pointed out that despite a muted demand environment over the past several quarters, Indian IT stocks have held firm.

Indian IT sector has been under pressure over the last two years after the Covid-19 pandemic boost.

The Nifty IT index has gained about 30 per cent in the last two years, compared with the Nifty 50's 54 per cent rise in the same period.

However, over the last one year, the gap of underperformance has narrowed. Nifty IT is up 21 per cent, and Nifty 50 is up 25 per cent in the last year.

Stocks such as Persistent Systems (up 57 per cent) have steeply risen since last year.

Stocks such as Mphasis (up 29 per cent), Wipro (up 28 per cent), Tech Mahindra (26 per cent), HCL Tech (24 per cent) and L&T Tech (23 per cent) have also gained significantly.

However, TCS (17 per cent), Coforge (17 per cent), Infosys (16 per cent) and LTIMindtree (0.6 per cent) have underperformed the IT index.

"Strong booking numbers and acceleration in growth rates from a decline to a positive aided by inorganic growth may spur some excitement given the sector's buoyancy on any positive indications on demand," said Kotak.

Brokerage firm Emkay Global Financial Services pointed out that Accenture's Q4 guidance of 2-6 per cent growth in local currency indicates a steady FY24 exit, and this stability bodes well for Indian IT companies, even as a full-fledged recovery is now expected in CY25/FY26.

"We expect the start of the interest rate-cut cycle to act as a signalling trigger for clients to gain confidence in the inflation trajectory and macro stability, which may drive demand recovery and an uptick in discretionary spending. We expect the IT stocks’ earnings downgrade to bottom out in the first half of the current financial year (H1FY25) if current expectations on interest rate cut materialise," said Emkay.

"Our pecking order is Infosys, HCL Tech, Wipro, Tech Mahindra, TCS, and LTIMindtree in large-caps. Among mid-caps, we prefer Cyient, Birlasoft, Zomato, Firstsource Solutions, and Mphasis," Emkay said.

Outlook still hazy

The outlook for the sector is still hazy, even though hopes of economic growth and rate cuts may keep the stocks up. 

According to the brokerage firm Nirmal Bang, Accenture has highlighted that demand conditions remain unchanged from earlier quarters. These conditions are characterized by ongoing large-scale transformation deals that convert to slower revenue. At the same time, discretionary spending continues to be subdued, except for early-stage Generative AI experimentations.

Nirmal Bang observed that discretionary spending continues to be under pressure while decision-making is slow. Moreover, small deals, which will convert into revenue faster, are fewer in number, as was the case in recent quarters. Pricing pressure persists across the business, reflecting a very competitive market.

Nirmal Bang pointed out that Accenture, which had cut its initial revenue growth guidance for FY24 from 2-5 per cent growth in local currency terms to 1-3 per cent, further narrowed it to 1.5-2.5 per cent.

"Not sure whether Q4FY24 is going to be a turnaround quarter for Accenture and the IT industry as it is hinting at better times after a very weak FY24 (-1 per cent organic growth)," Nirmal Bang said.

"We think it is too early to state that a turnaround for the IT sector is in the offing. We are not sure how much of this is Accenture-specific. We maintain our ‘underweight’ stance on the Indian IT services sector, which we had initiated 27 months back, and we believe that the ‘slower for longer’ phenomenon could lead to further downward revisions in revenue and earnings for FY25 and possibly even FY26," said Nirmal Bang.

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Disclaimer: The views and recommendations above are those of individual analysts, experts, and brokerage firms, not Mint. We advise investors to consult certified experts before making any investment decisions.