The sentiment for information technology stocks has been growing stronger by the day as hopes of a revival in discretionary demand grow, spurred by expectations of imminent rate cuts from the Federal Reserve. This increasing bullishness has led to another wave of buying in IT stocks, pushing the Nifty IT index up by over 2 percent to a new peak of 42,712.50 on August 28.
The optimism extends beyond this recent rally, with the sectoral index outperforming the benchmark Nifty 50 over the past week. While the Nifty IT index surged nearly 3 percent during this period, the Nifty 50 gained around 1.3 percent.
Several analysts also anticipate a rebound in information technology stocks, citing their recent underperformance, which has kept valuations in the sector relatively reasonable compared to the inflated levels seen in much of the market.
Alongside that, the positive management commentary by most IT majors post the Q1 results, hinting that the worst for the sector is behind, has ushered further confidence among investors.
Axis Securities noted in a report, "Most IT companies demonstrated improved performance in Q1FY25, suggesting a revision in demand and a stabilization of uncertainties in key global economies." This positive outlook is echoed across the industry, with deal wins and the adoption of emerging technologies such as AI (Artificial Intelligence) and IoT (Internet of Things) fueling the sector's resurgence.
Also Read | Turning point for IT: Green shoots in Q1 hint at recovery in FY25
Meanwhile, Fed Chair Jerome Powell, in his speech at the Jackson Hole Symposium, also indicated that the time has come for monetary policy to adjust, opening doors for expectations of a rate cut in the central bank's upcoming September meeting.
This imminent rate cut could further boost discretionary spending and deal flow for IT companies. Since Indian IT companies generate the majority of their revenues from outsourcing deals with US companies, improvement in macroeconomic conditions in the world's largest economy can place the sector well into a path for a strong V-shaped recovery, Axis Securities believes.
Sectoral gainers
IT stocks dominated the list of top five gainers on the Nifty 50, with LTIMindtree leading the pack. The shares of LTIMindtree surged 7 percent after Kotak Institutional Equities upgraded the stock from 'reduce' to 'add' and raised its target price to Rs 6,200. This upgrade followed a Karnataka High Court stay on a Rs 378-crore tax order against the company related to alleged non-payment of integrated goods and services tax.
Kotak also believes that LTIMindtree is on the path to a healthy recovery in revenue growth in the next couple of years from the trough of FY24, aided by a recovery in spending sentiments in the BFS vertical.
Other IT stocks like Infosys, Wipro, and TCS also jumped 2.5-4 percent amid improving sentiment for the sector.
Also Read | This mid-cap IT party is getting lit; NIIT, Datamatics, KPIT Tech, eClerx Srvcs surge 6-20%
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