What's driving the Nifty IT Index rally in the past few days?

Representative image

Indian IT sector’s long pending recovery, hopes of Fed rate cuts and the growth expectations in the upcoming earnings season drove ongoing Nifty IT Index’s rally as it touched a four-month high during intra-day trading earlier this week, said industry experts.

Listed IT companies, including Tata Consultancy Services (TCS), Infosys, HCLTech, Wipro, Tech Mahindra, LTIMindtree, LTTS, Persistent Systems, Coforge, Mphasis among others contribute a significant chunk of the overall Nifty indices.

Sumit Pokharna, VP & Fundamental Analyst – IT, Kotak Securities, called this rally an expected “sectoral rotation”.

“Most of the sectors have outperformed and given decent returns except for IT sector which has been underperforming for over a year or more now. Other sectors like banks, real estate have moved and IT sector contributes a significant portion in the Nifty basket,” he told Moneycontrol.

Pokharna added that expectations are also building up as the industry approaches its first quarter earnings announcements in July. As the IT sector’s performance was badly hit until Q4 and particularly in FY24, the base has gone down. But, FY25 is predicted to be slightly better.

“Market is predicting better than expected H2 FY25 and H1 FY26E on back of expectations of rate cut in December 2024 leading to improved business environment for BFSI, Retail, Manufacturing, Pharma; rally of Hi-Tech players and expectation of outsourcing growth from hyperscalers and software product partners," Gaurav Vasu, founder of market intelligence firm UnearthInsight told Moneycontrol.

UnearthInsight predicted 3-5 percent growth in FY25 for tech services players and expect FY26 could improve to 5-6 percent as growth comes back in BFSI, Retail and Hi-Tech sectors.

Analysts unanimously expect the April-June quarter of FY25 to be sequentially better in terms of growth. The sector also saw some seasonal tailwinds like large deal ramp up, discretionary spending coming back and coupled with lower headcount numbers, experts expect Ebit margins to improve too. However, Ebit margin jump could vary depending on wage revisions by individual companies.

According to a report by Kotak Institutional Equities, among Tier-1 IT companies, Infosys is expected to the lead the growth in Q1. Pokharna added that this will be majorly due to low base and slower growth the company had in the previous quarters.

“Infosys will lead the growth among Tier 1 companies, with 2.5 percent QoQ growth, followed by LTIMindtree at 2.0 percent and TCS at 1.5 percent. Wipro and Tech Mahindra will likely report flat revenues. On expected lines, HCLTech will report 2 percent revenue decline QoQ,” the Kotak report said.

It added that among mid-tier IT firms, KPIT Technologies will lead with 5.5 percent estimated growth QoQ and Persistent Systems with 3.5 percent QoQ growth.  While Mphasis with 0.5 percent sequential growth and Cyient - 2.6 percent growth will disappoint.

“The brutal winter of discretionary spend cuts in the industry is likely over, but there is little evidence of a recovery in the flow business. Hence, we are on track for one of the weakest first quarters for at least 10 years. The situation, though slightly better, is eerily similar to what we witnessed in 1HFY24,” said a report by Motilal Oswal Financial Services (MOFSL).

Analysts at MOFSL will be looking for signs of recovery in discretionary spending in the form of deal activities, which have been heavily skewed towards cost-takeout projects. “Any disappointment in 1QFY25 could again put pressure on 2Q,” they added.

Though the worst appears to be over for the IT services sector, full recovery is unlikely to come in FY25 as was earlier expected, according to Pokharna.

“Everyone was expecting a Fed rate cut, but that seems to be getting delayed. Coupled with macroeconomic uncertainty, looks like recovery will only happen in FY26, though FY25 will see some improvement,” he said.