Why are IT stocks gaining despite weak results — explained

Indian IT stocks were in focus on Friday, July 14, as they rose up to 7 percent despite reporting muted results in the first quarter that ended on June 2023 of this financial year 2023-24 (Q1FY24). The Nifty IT index was the top performing pack, led by gains in industry heavyweights Infosys and Tata Consultancy Services (TCS), even as Nifty50 traded almost flat.

The index closed at 30,945.50, up 1,317.30 points or 4.45 percent, with 10 stocks in the green. On Friday, Nifty IT witnessed the biggest single-day gain since September 2020.

Indian IT and some IT-enabled tech stocks are widely considered as shadow of Nasdaq index. In the last one week, Nasdaq has rallied 3.44 percent, compared to a 3.62 percent rally in the Nifty IT index.

Friday turned out to be the best day in four months for the Nifty IT index. From March lows, the index was up 7 percent as compared to Nifty gaining 15 percent.

The top gainers were Mphasis, L&T Technology Services and Tech Mahindra were up 6.97 percent, 4.31 percent and 4.14 percent, respectively. Among other stocks, Infosys and Tata Consultancy Services also rose 3.03 percent and 3.14 percent, respectively. HCL Technologies, Coforge, Persistent surged over 3 percent in trade today.

"There is no froth in the IT sector, while numbers will continue to be weak for next couple of quarters, we believe probably the same is getting reflected already in terms of downgrades. Even if you look at this quarter, despite TCS, HCLTech and the Wipro numbers not being great, the extent of downgrades have been minimal. So while near term, we believe this is a tactical rally and may not offer huge upsides, but at the same time, the downside is also fairly limited in IT and from a 12-month view, one should look to accumulate this sector now," said Varun Lohchab, Head-Institutional Research at HDFC Securities.

Lohchab added: "That has been our view for last few months, when we have progressively cut our underweight call on the sector and we are more now closer to neutral on the sector."

IT services revenue grew -2.8 percent quarter-on-quarter in constant current (CC). TCS posted dollar revenue growth of 0.4 percent QoQ, which was in line with expectations. Meanwhile, HCL Tech posted a revenue slip of 1.3 percent QoQ, with all three Service offerings declining for the first time in the last 12 quarters.

HCL Tech guides for recovery and maintains FY24 guidance

Wipro Q2 guidance of -2 percent to +1 percent is slightly better than estimates

Some on the street were anticipating -1 percent to -3 percent guidance for Wipro

The strong deal flow momentum, despite the uncertainty in decision-making process, reinforces analysts' positive stance on the sector, analysts said. "Given revenue deceleration in FY24, impacted by cut in discretionary spending, is already known and priced in, we expect growth to bounce back in FY25, for the entire sector, driven by a sustainable strong demand environment," Nuvama said.

TCS shall be one of the biggest beneficiaries of this demand, driven by its capabilities in winning transformational as well as cost takeout deals – as manifested in its deal-wins in Q1, the brokerage stated.

Wipro's muted Q1FY24 performance and weak Q2FY24 guidance reaffirm its troubles with converting deal-wins into growth. The decline in Q1 (and possibly Q2) translates into possibly the lowest growth among large-caps – might even report a decline in top line YoY, Nuvama said.

HCL Tech's weak Q1 performance makes meeting its FY24 guidance a tall ask. Yet, even if it misses its guidance, Nuvama believes it will still be one of the fastest growing largecap (in IT Services). Its strong growth in services and lower exposure to the troubled BFSI segment imply high probability of stable earnings growth. High dividend yield and inexpensive valuation provide a floor to the stock price.