IT stocks extend gains, lead indices to new highs

IT stocks extend gains, lead indices to new highs

The bull rally in the Indian stock market continued on Tuesday, with key indices hitting record highs, driven by buying in heavyweight Reliance and IT stocks.

While the Sensex closed 0.31% up at 66,795.14, the Nifty 50 settled at 19,749.25, up 0.19%. Both benchmarks rose to hit new all-time highs but profit booking led to Sensex closing at below 67,000.

Despite lacklustre June-end earnings of big IT companies, the IT index has gained nearly 7% in a week. After recording the biggest single-day jump on Friday, since September 2020, IT stocks continued to be in momentum this week.

“Though TCS, HCL Tech and Wipro numbers were not flattering, some comfort was seen on the outlook front. With humongous cashflow generation capabilities of major Indian IT services companies, we believe the stocks would support the benchmark index as well.

“From here on, any dips in the IT sector stocks should be used as an opportunity to take position in a staggered manner”, said Manish Chowdhury, Head of Research, StoxBox.

In a month, while the Nifty 50 is up 5.30%, the IT index has gained nearly 9.28%. On a year-to-date basis, all the IT stocks have turned positive from their lows, barring Infosys which is down 2%, although it too, has recovered substantially from its lows.

As per Nuvama report, the strong deal flow momentum (by TCS, LTIM, Wipro) despite uncertainty in decision-making process, reinforces its positive stance on the sector. The brokerage firm expects growth to bounce back in FY25 for the entire sector led by a sustainable strong demand.

IT companies took a beating in the beginning of the year largely due to the banking crisis, which impacted the BFSI vertical for these companies.

“Despite the current macro concern about the global growth outlook, it is still a good time to buy IT stocks especially where the revenues are relatively stable. In the medium to long term, IT sector should perform well as there is a continuous demand for cloud adoption and digitization. Moreover, IT stocks are trading at reasonable valuations compared to their historical levels which could give a good entry point for the investors”, said Dinesh Gupta, fund manager, Torus Oro PMS.

However, some brokerages caution that amid the positive outlook, investors should be watchful of potential dampeners such as rising interest rates and geopolitical uncertainties.

“The IT service companies continue to face challenges owing to a slowdown in discretionary spending and weaknesses in BFSI, Communication, and Hi-Tech verticals”, said Sharekhan by BNP Paribas report.

The brokerage firm said that given uncertain macro environment and no signs of pick up in tech spends in the near term, the recovery would be gradual and is likely to get pushed further into Q4FY24.