Nifty IT soars 5% on strong TCS Q1 earnings, Fed rate cut hopes; nears all-time high

Indian IT stocks are performing exceptionally well today, with many trading with gains of up to 6%. This surge is attributed to TCS's strong Q1 earnings and the anticipation of a Fed rate cut. All 10 constituents of the index are in positive territory, led by Coforge, which has gained 6.1%, followed by Mphasis and TCS, with rallies of 5.9% and 5.1%, respectively.

Other notable gainers include Persistent Systems, LTIMindtree, L&T Technology Services, HCL Technologies, and Infosys, all trading with gains between 3% and 4.5%. Wipro and Tech Mahindra have both reached new 52-week highs, with Wipro hitting ₹556.90 and Tech Mahindra touching ₹1,507.20.

The gains propelled the Nifty IT index to a new 52-week high of 39,144 points, with an increase of 4.85%. TCS alone contributed 31% to the index's rally, with Infosys and Wipro together adding another 30%.

At its current level, the IT index is trading close to its all-time high of 39,446 points. While many major sectoral indices have hit fresh all-time highs at least once in 2024, the Nifty IT index has yet to achieve this milestone. 

If the rally continues until the end of the session, there is a possibility that the index will reach a new record.

Meanwhile, the robust performance of IT stocks today has also driven the major indices, Nifty 50 and Sensex, to new all-time highs. The Nifty 50 crossed the 24,500 mark for the first time, peaking at 24,592 points, while the Sensex edged closer to the 81,000 mark, reaching a fresh record high of 80,893 points.

Signs of revival

TCS reported strong numbers for the June ending quarter post market hours on Thursday, indicating early signs of revival for a sector that has been grappling with sluggish demand. The IT major posted an 8.72% year-on-year (YoY) rise in its consolidated net profit to ₹12,040 crore for Q1 FY25, compared to ₹11,074 crore in the same quarter last year.

Revenue from operations for the quarter stood at ₹62,613 crore, marking a 5.4% YoY increase from ₹59,381 crore in Q1 FY24. In constant currency (CC) terms, TCS registered a 4.4% YoY growth in revenue.

As TCS's Q1 numbers surpassed estimates, analysts revised their target prices for the stock higher. Nuvama, maintaining a 'Buy' rating, raised its price target to ₹4,800 apiece from ₹4,560, citing strong deal wins expected to convert into revenue in the coming quarters.

Jefferies upgraded the stock to 'Buy' from 'Hold' and increased its price target to ₹4,615 apiece from ₹4,030, highlighting the results as emerging signs of revival and noting employee net addition as a positive indicator.

Nomura maintained a 'Neutral' rating but upped its price target to ₹3,860 apiece from ₹3,800, projecting FY25 to be better than the previous fiscal year, with USD revenue expected to grow 6.4%–7.7% YoY in FY25–26, up from 4.1% in FY24.

Earlier, the Japanese brokerage firm forecast a gradual improvement in margins for Indian IT firms, driven by the ramp-up of large deals and increased hiring in the second half of FY25F. It projects that FY25F revenue growth for Indian IT companies will be bolstered by significant cost-reduction initiatives, despite initial transition costs.

Morgan Stanley, with an 'Overweight' rating, raised its price target to ₹4,480 apiece from ₹4,350. It stated that the results confirm growth trends are bottoming out, though it does not foresee a revenue upgrade cycle yet.

Rate-cut anticipation

Market expectations have surged, anticipating that the Federal Reserve will cut interest rates by September and again in December. This follows the release of the US annual inflation rate on Thursday, which fell for the third consecutive month to 3% in June 2024, the lowest since June 2023, down from 3.3% in May and below forecasts of 3.1%.

This increase in expectations for a Federal Reserve rate cut has led traders to price in a 93% chance of a rate cut in September, up from 73% on Wednesday.

The Fed had previously postponed rate cuts and revised its projections due to inflation trending above the central bank's target range in 2024. Between December 2023 and February 2024, Indian IT stocks surged in anticipation of the Fed's first rate cut in March 2024. 

However, due to persistent inflationary pressures, the Fed maintained its rates during that month and continued this stance in subsequent meetings.

With renewed optimism for a Fed rate cut, IT stocks have experienced increased buying activity in June, and this trend has extended into July. The overall positive sentiment and rebound in foreign portfolio investor (FPI) inflows have also contributed to IT stocks trading at higher levels

High interest rates and geopolitical risks have impacted demand for services from Indian IT companies since fiscal year FY23. Globally, clients are cutting discretionary tech spending and awarding smaller deals that have lower margins. 

Analysts expect that a likely interest rate cut cycle in the second half of the year and a potential thaw in decision-making by U.S. corporates post elections in November 2024 could boost demand.

Disclaimer: The views and recommendations given in this article are those of individual analysts. These do not represent the views of Mint. We advise investors to check with certified experts before taking any investment decisions.