The Nifty IT index ended in positive territory for the fourth consecutive trading session on Tuesday, closing at 31,371, up by 1.06%. Over the last four trading days, the index has soared 2,278 points, or 7.8%, recording a gain of 6.12% in the current month so far, the largest monthly gain since October 2022.
Looking back, Indian IT stocks faced challenges and underperformed the broader market due to factors like recession concerns in key economies such as the US, EU, and Eurozone, which are crucial markets for Indian IT companies. These markets contribute a significant portion, ranging from 40% to 70%, to the overall revenues of Indian IT firms.
This, coupled with the weak performance during Q4 FY23, further dampened investor sentiment, resulting in a sharp correction in the majority of large-cap IT stocks.
In addition, the performance of TCS, HCL Tech, and Wipro in Q1 FY24 also fell short of street estimates.
TCS, India's largest IT services company, reported a year-on-year (YoY) increase of 17% in its consolidated net profit, reaching ₹11,074 crore in Q1. However, the net profit was down by 3% sequentially.
Similarly, HCL recorded a net profit of ₹3,534 crore in Q1 FY24, showing a YoY growth of 7.6%, but it posted a QoQ decline of 11.2%. On the other hand, Wipro’s Q1 FY24 performance missed the brokerages' estimates on all fronts.
Despite the subdued Q1 earnings, the sharp rally in the IT stocks came after the inflation in the U.S. came in lower than estimates.
According to media reports, the annual inflation rate in the U.S. came in lower than expected at 3% in June, the lowest since March 2021. When compared to May, the inflation rate was down by about 1000 basis points.
The controlled inflation in the US has instilled optimism among investors that a 25-basis-point rate hike would be sufficient to stabilise the US economy. This improved outlook has fueled strong buying interest in Indian IT stocks, despite the subdued Q1 earnings, according to analysts.
This drop in inflation has altered US recession probabilities. Goldman Sachs' Chief Economist Jan Hatzius said on Monday the bank was cutting its probability that a U.S. recession will start in the next 12 months to 20% from an earlier 25% forecast, Reuters reported.
"We are cutting our probability that a US recession will start in the next 12 months further from 25% to 20%. The main reason for our cut is that the recent data have reinforced our confidence that bringing inflation down to an acceptable level will not require a recession," Jan Hatzius was quoted as saying in the report.
"We do expect some deceleration in the next couple of quarters, mostly because of sequentially slower real disposable personal income growth and a drag from reduced bank lending," Hatzius added. However, he expected the economy to continue to grow, although at a below-trend pace.
Anand James, Chief Market Strategist at Geojit Financial Services, said, "The Nifty IT index is coming off a long period of underperformance and is still almost 20% below its record peak, even though many other sectoral as well as benchmark indices have tested new peaks. This encourages us to remain optimistic on the index and is positive on seeing new leaders emerging."
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie.
