IT index slips 4% in 2 days on profit booking following a strong 10% rally

Shares of information technology (IT) quoted lower for the second straight day, with the Nifty IT index declining as much as 4 per cent in the past two trading sessions on account of profit booking. The IT index had hit a record high of 39,286 on Tuesday’s intra-day trade, and rallied up to 10 per cent in the preceding 11 trading days.

At 11:46 am; Nifty IT index, the top loser among sectoral indices, was down 1.9 per cent, as compared to 1.3 per cent decline in the Nifty50 index. Tata Consultancy Services (TCS), Infosys, HCL Technologies, Mphasis, Tech Mahindra, Mindtree and Larsen & Toubro Infotech from the index were down 2 per cent each.

IT companies will start reporting Q3 earnigns next week. The The October-December (Q3) quarter is expected to be another strong quarter for IT companies after strong performance witnessed in Q2FY22. Growth momentum is expected to continue further with mid-caps outperforming Tier I companies.

Analyst at ICICI Securities expect companies to report healthy revenue growth in this quarter led by lower furloughs, ramp up of deals won in the previous quarters. There would be some cross currency headwinds, which will dampen dollar revenues to some extent in the quarter.

The companies are also seeing a demand tailwind in terms of investment in newer technologies like cloud transformation, AI/ML, block chain, which further propel demand in coming quarters.

In terms of margins, we expect them to remain stable (barring Coforge that is expected to post strong QoQ margin expansion) since supply side pressure would restrict margin expansion in proportion to revenue growth, the brokerage firm said in Q3 result preview.

Despite seasonal weakness, analysts at Jefferies expect IT firms to deliver 3-3.9 per cent QoQ constant currency (CC) growth driven by deal ramp-ups. The foreign brokerage house expect aggregate margins to see a decline of 20bps QoQ, due to supply side pressures.

“We expect healthy revenue growth momentum to continue in the seasonally soft Q3 on the back of a broad-based secular demand environment, with USD revenue growth of 1.9- 3.3 per cent QoQ (2.7-4.0 per cent CC) for Tier-1 IT services companies. Tier-2 IT services companies are expected to grow in the range of 1.1-10.5 per cent CC QoQ,” analyst at Emkay Global Financial Services said.

The Nifty IT index delivered around 10.5 per cent return in the last three month and outperformed the broader markets by 12 per cent. We believe that sustained revenue growth momentum with margin stability will sustain higher valuations, the brokerage firm said.

TCS, Infosys and Wipro are scheduled to announce their Q3 result on January 12, 2022. The board of directors of HCL Technologies is scheduled to meet on January 14, 2022.