Short Call | Can Indian IT finally break the cycle of earnings gloom? Varun Beverages, Skipper in focus

The Nifty IT index soared by 16 percent in the September quarter, driven by hopes that the sector, after several quarters of earnings downgrade, is finally ready for a comeback.

As the curtain is about to rise on the September-quarter earnings season, the Indian IT sector finds itself standing on the edge of a dramatic reveal. Anticipation is thick in the air—the market is hoping for a positive surprise, but the mood is tinged with caution.

The Nifty IT index soared by 16 percent in the September quarter, driven by hopes that the sector, after several quarters of earnings downgrade, is finally ready for a comeback. Following Accenture's stellar earnings, the Nifty IT gained an additional 6 percent, outshining the Nifty 50.

Analysts are betting on Q2 growth rates to at least mirror those of Q1—or perhaps even offer a glimmer of improvement, fueled by a revival in the US banking sector and rate cut by the Fed. Some brokerages forecast revenue acceleration and an earnings turnaround in Q2 FY25. They even hint at a potential margin recovery driven by lower attrition and deferment of wage hikes. But here's where the plot thickens.

While the IT sector's recent performance offers some hope, there's a persistent undercurrent of concern. High valuations remain a point of unease, and IT companies continue to face challenges like slow discretionary spending and the absence of large deal ramp-ups.

So, which narrative holds more weight? As we prepare to dive into the numbers this week, we're left wondering: Will this quarter be IT's long-awaited magnum opus, or will the sector once again lament, "Ye dukh kaahe khatam nahi hota"?

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Varun Beverages (Rs 591, +9%)

Shares surged ahead of the company's board meet to mull over a QIP fund raise.

Bull Case: Holds the potential to become the largest and most disruptive PepsiCo bottler in the company's history, wrote HSBC. If company adopts new AI tools and strategies before peers, it can pick up speed and expand its market share, HSBC noted.

Bear Case: An increase in competitive intensity, forex fluctuations and spike in raw material costs may drag growth for the company. Capex plans worth Rs 3,600 crore for CY2024 may also hinder margin expansion.

Skipper Ltd (Rs 508.60, +14.8%)

Stock surged as Nuvama initiated coverage on the stock with a buy rating

Bull Case: Skipper Ltd is well-positioned to leverage the NEP 2022–32's Rs 9.3 lakh crore capex opportunity, driven by urbanization and renewable energy demand. With plans to double capacity and a projected revenue CAGR of 26% by FY27, it presents a compelling investment case.

Bear Case: Skipper Ltd faces order execution risks, as any slowdown in power T&D awards could harm revenues. Additionally, rising steel prices may threaten operating margins due to fixed-price contracts, while reliance on government initiatives exposes it to cyclical demand fluctuations.

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