Most IT stocks witnessed strong traction in morning trade on Friday, September 27, which boosted the sectoral index Nifty IT by almost 3 per cent, buoyed by better-than-expected Q4FY24 results and healthy FY25 revenue growth guidance of global IT player Accenture. Accenture follows a September-August financial year.
Several IT stocks, including Coforge, HCL Technologies and Persistent Systems hit their fresh 52-week highs. Around 11:35 am, the Nifty IT index was up by a per cent, with all components in the green.
As Mint reported earlier, Accenture unveiled a $4.0 billion share buyback and reported better-than-expected fourth-quarter revenue driven by a high demand from companies looking to adopt generative artificial intelligence (AI) technology.
Accenture hiked its annual revenue growth forecast to 3-6 per cent for 2025 after improving macroeconomic indicators and the US Federal Reserve's latest 50 bps interest rate cut.
Investors closely watch Accenture's results and management commentary. As a global leader in IT services, consulting, and outsourcing, Accenture serves as a bellwether for the IT industry.
Experts seem to be positive about the prospects of the Indian IT sector after Accenture's latest earnings and growth guidance. However, they caution that investors must be selective while picking stocks from the sector.
Manish Chowdhury, the head of research at StoxBox, believes that most of the negatives related to IT spending seem priced in the sector.
"With Accenture results released yesterday showing confidence about growth prospects, we sense that we would gradually see a broad-based recovery across verticals going ahead. The recent rate cut by the US Federal Reserve would act as a catalyst to discretionary spending and should garner incremental deal flows," Chowdhury said.
Chowdhury finds the sector's overall texture positive, from medium to long-term positives, as companies have optimised their operating metrics in the last few quarters and taken steps to move towards new-gen technologies.
"With the valuation of the sector still not looking very juicy, we rule out a further meaningful correction in multiples as we expect incremental FII flows into the sector, and the recent IT management commentaries also suggest that the worst is behind for the overall sector," said Chowdhury.
Kunal Mehta, the associate director at Equirus, underscored that Accenture’s strong order intake in managed and outsourcing services augurs well for Indian IT.
However, he is watchful regarding the discretionary spending outlook given Accenture's mixed commentary on the subject, which indicated clients’ continuous cautious approach even as the company expects revenue growth to pick up in the consulting business in FY25E.
"Considering this and the recent run-up in sector valuations, we reiterate being selective in the sector and recommend selecting stocks with decent growth visibility," said Mehta.
Nuvama Wealth Management underscored that Accenture's growth is expected to pick up with contributions from consulting as well as the outsourcing business.
"Improvement in consulting is particularly positive for Indian IT services as it signals a recovery in discretionary spending. We maintain our positive stance on the sector and expect a sustainable, strong demand environment to drive healthy earnings growth over the next three years," said Nuvama.
According to global brokerage firm Emkay Global Financial Services, Accenture's Q1 guidance of 2-6 per cent growth in LC indicates a steady start to FY25, and the revenue growth guidance of 3-6 per cent for FY25 points to a broadly stable demand environment and conservative management approach, considering the prevailing macro uncertainties.
"We believe the uptick in technology spending in CY25 hinges on confidence in macro stability and resilience of the US economy after the start of the interest rate-cut cycle," Emkay observed.
"Nifty IT Index has outperformed the broader markets by nearly 10 per cent in the last three months on the back of expectations of the anticipated recovery in demand; however, it underperformed in the last one month by nearly 3 per cent, as its premium to the broader market leaves the limited scope of outperformance in the absence of a real uptick in demand," said the brokerage firm.
Emkay's pecking order is Infosys, HCL Tech, Tech Mahindra, TCS, Wipro, and LTIMindtree in large caps. Among mid-caps, the brokerage firm prefers eClerx Services, Cyient, Birlasoft, and Firstsource Solutions.
"Investors should use any sharp up-move in India IT services stocks on the back of this to take some profit, especially in names where earnings visibility (TCS) or valuation comfort (HCL, LTIM) is limited. Infosys, Wipro and Tech Mahindra remain our large-cap picks," said brokerage firm JM Financial Services.
Brokerage firm Prabhudas Lilladher has a 'buy' recommendation on HCL Technologies (target price: ₹1,790) and 'accumulate' recommendations on TCS (target price: ₹4,370), Persistent Systems (target price: ₹5,320), LTIMindtree (target price: ₹6,040) and Cyient (target price: ₹2,130).
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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.
