Nifty IT up after Fed signals rate cut; HSBC cautions on midcap IT stocks

Nifty IT up 1.77 per cent intraday after US Fed signals rate cut in September. HSBC believes mid-tier IT is not so strong.

IT stocks rally: The Nifty IT index, which tracks the performance of India's top IT companies and the Information Technology (IT) sector as a whole, gained 1.77 per cent in the intraday trade on Monday, August 26. The uptrend in IT stocks came after the US Federal Reserve, at the Jackson Hole meet, signalled a likely rate cut in September.

"Indian equity benchmarks made positive start with IT sector leading the pack on Monday after US Federal Reserve Chairman Jerome Powell's speech indicated that an interest rate cut cycle by the US central bank was not too far away. Investors are also anxiously awaiting earnings from AI darling Nvidia on Wednesday to see if it can match the market's uber-high expectations," said Narendra Solanki, Head Fundamental Research - Investment Services, Anand Rathi Shares and Stock Brokers.
 

Both these above triggers aided today's IT sector optimism, Solanki added.

At the last count, Persistent Systems shares were up over 2 per cent, while Wipro, LTIMindtree, Infosys, TCS, Mphasis, HCL Tech, and Tech Mahindra were up over 1 per cent each on the Nifty IT index. Meanwhile, Coforge was up 1 per cent and L&T Tech services were up 0.36 per cent.

HSBC on Indian IT stocks

Global brokerage HSBC, however, cautions investors against the rise in Indian IT stocks, especially the mid-tier stocks.

"Most incremental growth in mid-tier IT companies is coming from margin dilutive 'cost-rationalisation' deals, and it has been hurting the margins of mid-tier companies more than top-tier companies. However, cash conversion has improved for many of the mid-tier companies in FY24," the report read.

While the growth outperformance is normalising, the real negative surprise has been the weaker operational resilience of mid-tier companies (in the recent quarters) compared with the top-tier, HSBC added.

The global brokerage has downgraded KPIT to 'Hold' from 'Buy' and prefers L&T Tech over KPIT and Cyient on the back of its single vertical exposure and some early signs of slowdown in the Autos vertical.

"Mid-tier average valuations are now at a 50 per cent premium to top-tier companies, compared with 35 per cent in the past five years," HSBC said.

Analysts believe the revenue growth of mid-tier IT companies has significantly outperformed top-tier IT since the end of the pandemic, leading to a sharp re-rating. This growth differential, however, has started to moderate, and we continue to estimate it will settle in a 4-6 per cent range (over the next two years) from an average of 10 per cent since the pandemic ended.