IT stocks log biggest gain in nearly three years as growth worries ebb

Nifty IT index jumps 4.5%; Bellwether TCS leads the gain

The gauge for the performance of informational technology (IT) stocks soared nearly 5 per cent—most in nearly three years—as growth worries eased following a robust order book posted by bellwether Tata Consultancy Services (TCS). The Nifty IT index rose 4.5 per cent to close at 30,945. This was the biggest single-day gain since September 14, 2020.

Industry titan TCS’ shares rose 5 per cent to Rs 3,509. The stock was the biggest gainer and contributor to the Sensex and the Nifty gains. Infosys, Tech Mahindra, LTI Mindtree and HCL Tech—each rose close to 4 per cent—were the next biggest gainers on the Nifty.

The surprise rally in the beaten-down IT stocks came after TCS demonstrated that the order pipeline remains strong for the industry, particularly from newer areas such as artificial intelligence (AI).

“TCS noted that customers have been re-assessing tech spends, especially where return on investment was low, and it avoided giving any indication of the timing of a demand recovery. However, TCS is optimistic about Generative AI (GenAI) as it is currently working on multiple proof of concepts, with c100 opportunities in the pipeline. We see TCS benefiting, both on demand and cost, from GenAI’s new use cases and higher productivity. We see subsiding macro concerns as key to demand recovery as deal signings ($10.2 billion, book-to-bill: 1.4 times, ex-BSNL) and pipeline remain strong,” said BNP Paribas in a note.

“Continued strong deal signings give us confidence that the slowdown is transient and we think TCS will gain revenue market share in a cost-focussed demand environment,” it added.

During the week, the index rose 6.4 per cent, its biggest weekly showing since the week ended July 22, 2022.

Due to the macroeconomic uncertainties in the developed world, analysts had scaled back growth expectations for the sector. As a result, IT stocks saw sharp de-rating and the sector underperformed the market in recent years. In the past two-years, the Nifty IT index has risen 5.5 per cent even as the Nifty has rallied 23 per cent.

Many on the Street were stunned by this week’s rally as the earnings posted by large firms like TCS, Wipro and HCL Technologies failed to meet consensus estimates.

A report by Nomura said the revenue growth in the ongoing financial year (FY24) could remain muted and once needs to be cautious on the sector.

“We remain cautious on the India IT services sector. We believe FY24 will likely be a year of revenue growth disappointment and the much-anticipated recovery of operating margin would be delayed given weak growth,” the brokerage said in a note.

“The macro slowdown and continued high inflation in the developed markets will likely impact the tech budget outlook for most industries in 2023F. We see significant moderation in the revenue growth rate of Indian IT companies in FY24F vs FY23F. We believe the void created by the lower number of small-sized and discretionary projects, along with delays in client decision-making and ramp-up of won projects in certain cases, will lead to both revenue and margin disappointment in the near term, given the ‘sticky’ nature of costs,” Nomura added.