Short Call | A bright future for IT or issues being swept under the rug? Coal India, IndiGo in focus

Short Call

As Indian IT firms unveiled their September quarter earnings, a flicker of revival appeared, especially in US discretionary spending within the BFSI segment. So, what's the outlook for IT stocks right now?

Analysts are 'cautiously optimistic.' Why? The US interest rate cut cycle could stimulate increased spending across various sectors, with IT as a key beneficiary. Adding to this momentum, a long-awaited trend of headcount growth has returned to the sector. For IT, hiring isn't just about numbers—it's confidence in the recovery story. Indian IT giants have resumed hiring, with Q2FY25 results and management insights signalling future demand, sparking the need for both experienced hires and fresh talent. Meanwhile, the solid earnings from major US banks hint at a ripple effect that could boost Indian IT services.

Yet, the picture isn't all rosy. While US market offers promise, Europe's automotive and manufacturing sectors are struggling, presenting headwinds that Indian IT may feel down the line. And with more hiring comes higher costs, which could press margins. Seasonal factors like wage hikes and furloughs in Q3FY25 might also create margin pressure.

Even so, amidst October's market turmoil wherein foreign investors offloaded Indian equities worth over Rs 1,00,000 crore, pushing most Nifty sectoral indices down 3-14 percent, IT remained largely flat. But can it continue to defy the broader market downturn if FII selling continues unabated? Or is the sector merely biding its time before it, too, feels the pinch?

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Coal India (Rs 443.75 , -3.76%)

Reported disappointing Q2 earnings as profit fell 22% YoY

Bull Case: "We believe a recovery potential in H2FY25 alongside medium-term growth + dividend yield story remains intact, and therefore, any correction should be a positioning opportunity in the stock," said Emkay Global

Bear Case: Lower coal volume amid weak power demand, heavy rainfall and increased competition along with softer prices have been impacting Coal India. CIL will try to push volume under e-auctions; should that happen, its prices will be hit further.

IndiGo (Rs 4,015.00, -8.04%)

The airline reported weak Q2 earnings with a net loss of Rs 987 crore

Bull Case: With crude prices likely to remain in check, IndiGo’s margins could benefit, particularly from its international focus. Supply chain issues slowing competitor expansion may also protect its market position, supporting steady growth despite premium valuations.

Bear Case: The airline faces pressures from high valuations, potential market share loss due to slower capacity expansion, and promoter stake sales. Additionally, intensified competition, regulatory unpredictability, and potential growth bottlenecks at crowded metro airports threaten profitability.

(With inputs from Zoya and Harshita)