IT stocks have been witnessing decent traction since June this year. The Nifty IT index has gained nearly 24 per cent since June. In contrast, Nifty 50 has gained over 8 per cent in the same period.
On the monthly scale, Nifty IT gained an 11 per cent in July so far, following an almost 12 per cent gain in June. On the other hand, the Nifty 50 rose nearly 7 per cent in June and is up about 2 per cent till July 24.
The recent gains in IT stocks could be largely attributed to optimism about rate cuts in the US with easing inflation. Most IT companies reported healthy numbers for the April-June quarter (Q1FY25), influencing investors. Are green shoots emerging in the sector, and should investors start betting on IT stocks? Should they prefer only large players from the sector?
We spoke to five experts to get their insights on the IT sector. Here's what they said:
Macroeconomic issues persist, and the demand for IT services has not fully recovered.
On the attrition front, all IT companies reported a decline as the job market has cooled from the heydays of the post-pandemic years.
However, fresh hiring has not picked up significantly so far. Most companies reported a decent quarter on the total contract value (TCV) metric.
The management of IT companies desisted from commenting on estimated recovery timelines in discretionary spending. In Q1FY25, green shoots were visible across these companies in the BFSI space, especially in North America.
Some IT companies believe that FY25 will be stronger than FY24 for them. The first quarter results (Q1FY25) of Indian IT services hint towards better fiscal growth than the preceding year, but there is still some time for the industry to be firing on all cylinders.
Investors can stop being bearish on the sector and stocks. But they have to realise that a steady uptrend could take some time to begin once better indications of demand are available.
Till that time, the stock prices could remain in a range.
Large-cap IT stocks will provide a margin of safety. In contrast, small/midcap IT companies can provide faster upmove if they can show exceptional growth in a quarter due to their niche competencies, though carrying higher risk.
The Nifty IT benchmark index is up almost 11 per cent in July, after the results announced by most of the IT companies, clearly indicating that, barring a few, investors appear to be showing renewed interest in the IT space.
The fortunes of the IT sector hinge primarily on the economic scenario and IT spending in the USA, as the bulk of the revenues generated originate from the USA and Europe.
Given that many IT stocks, such as Coforge, Infosys, Mphasis, Persistent and TCS, to name a few, have generated superior returns in July itself, investors should look at booking part profit, given that markets could witness enhanced volatility in the coming weeks and months.
Further, it makes sense to stick to large caps as, in the eventuality of any correction, the fall will be sharper in the midcap and the small-cap segments.
We are seeing green shoots in the IT sector, with most companies reporting better on-ground sentiment in various geographies.
We believe the BFSI vertical would lead to a revival in IT performance as companies drive up their technology spending plans on strong financial performance.
Also, most companies have developed their offerings in emerging technologies and optimised their hiring and resource utilisation metrics.
With most of the negatives seemingly priced in, we believe the risk-reward is favourable for accumulating IT companies from a medium to long-term perspective.
Our preference is tilted towards large-cap IT names such as Infosys and TCS because of their wider product bandwidth, large and varied deal pipeline, ability to take cost-cuts, and attractive valuations.
Recent performance from major IT firms has surpassed expectations, driven by significant improvements in the BFSI sector.
Given these results, we believe the most challenging period is behind us, as inflationary pressure is forecast to moderate in the US.
The sector's outlook is positive, bolstered by potential interest rate cuts in the US, which will lead to improvement in spending.
The Indian IT companies are focusing on improving operating profits by cost optimisation measures with strong traction in deal wins.
Overall, our stance remains positive for the sector in the future.
Although current valuations are premium compared to the five-year average forward PE, recovery signs in BFSI and the emergence of AI (artificial intelligence) and generative AI are the future revenue visibility, supporting continued investment in the IT sector.
Large-cap IT companies delivered better-than-expected results in Q1, showing improvements in margins, whereas mid-caps have missed the earnings estimate with expensive valuations compared to large-caps.
Therefore, large-cap stocks present a more favourable investment option.
A stock-to-stock approach is preferable in midcaps with companies focused on ER&D, Auto-EV, healthcare, etc.
In light of the Q1 results, it is evident that Indian IT giants have displayed resilience amid macroeconomic uncertainties.
Leading firms like TCS, Infosys, and HCL Technologies have exceeded market expectations, indicating robust performance and sequential growth across major markets.
Despite profit and margin pressures, revenue growth remains strong, showcasing the sector’s potential.
The Nifty IT index has shown significant momentum, surging over 24 per cent since June 2024 and reaching a new all-time high in July 2024.
This positive trend reflects increased investor confidence during market uncertainty, particularly in defensive sectors like IT and FMCG.
Large-cap IT companies remain relatively undervalued and continue to show favourable market sentiments.
The current environment makes it a suitable time for strategic investment in these companies.
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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.
