IT stocks gain on interest rate optimism; Infosys, TCS, Wipro up 1% each

In the past one month, shares of TCS, Infosys, HCL Tech, and Wipro have surged in the range of 4-13 percent as against 7 percent rise in the Nifty IT index

IT stocks gained on January 5, with TCS, Infosys and other big names rising more than a percent each as optimism prevailed over the end of interest-rate hike cycle despite near-term concerns over the December quarter results.

The gains in the two stocks along with LTIMindtree and HCL Technologies drove the benchmark Nifty IT index a percent higher.

"Despite industry challenges, there is optimism in the sector, which is driven in anticipation of the end of the rate-tightening cycle, which is expected to accelerate the resumption of delayed projects," said Vinod TP, Research Analyst at Geojit Financial Services.

Analysts expect the IT industry to report a muted sequential growth in the December quarter due to prolonged higher inflation, delay in discretionary projects and a sluggish growth. The October-December period is typically a slow quarter due to the holiday season in the US and European countries, which are the biggest markets for Indian IT firms.

The recent rally in the sector may face volatility in the short-term but substantial weakening was unlikely, analysts said.

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Infosys will kick off the Q3 earnings season when it will report its December quarter numbers on January 11 followed by India’s biggest IT services firm Tata Consultancy Services (TCS) and HCL Technologies.

Analysts at Elara Securities expect the IT firms to post muted results, with an average constant currency (CC) growth of 1.4-1.6 percent in dollar terms.

"Among tier-1, we expect HCL Tech to outshine with an estimated 4.8 percent quarter-on-quarter CC growth led by both services and products business,” the brokerage firm said in a preview note.

Among tier-2 firms, Persistent Systems may lead with steady quarter on quarter CC growth of 2.7 percent. KPIT Tech is expected to lead the pack in engineering research and development (ER&D) division, the brokerage firm said.

In the past month, TCS, Infosys, HCL Tech and Wipro have surged up to 13 percent against a 7 percent rise in the Nifty IT index.

The run-up indicated heavy expectations of a recovery in discretionary spending in CY24E, analysts at Kotak Institutional Equities said.

The brokerage firm prefers Infosys due to valuation comfort and upside potential in the event of significant recovery in discretionary spending.

IT stocks re-rated in the past several months on rate-cut hopes, leading to expensive valuations for many. “Infosys provides comfort around growth acceleration and upside potential. However, upsides are moderate in TCS and HCL Tech after the recent run-up in stock prices," they said.

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