IT Stocks Surge on Strong Q1 Results: Signs of Recovery for India's Tech Sector?

The Indian stock markets witnessed a significant surge in IT stocks in the last week. The BSE IT index soared 4.5 per cent in the past five sessions, closing at a record high of 40,620.28. This rally marked a remarkable recovery, with the index hitting a 52-week peak of 40,682, surpassing its previous high of 39,446 set on January 4, 2022.

The Nifty IT index also demonstrated robust growth, bouncing back 36 per cent from its 52-week low of 29,339 recorded on July 28, 2023. In the last one year, all constituents of the IT index reported positive returns, ranging between 18 per cent to an impressive 82 per cent.

The rally in IT stocks was led by strong Q1 performances from India's top IT giants. Companies reported a strong start to FY25, buoyed by a recovery in discretionary spending and a surge in artificial intelligence (AI) deals.

Indian IT Giants Beat Market Expectations

TCS, India's largest IT services company, reported an 8.72 per cent year-on-year (YoY) rise in net profit to Rs 12,040 crore for the June quarter, up from Rs 11,074 crore in the same quarter last year. Revenue from operations grew by 2.24 per cent YoY to Rs 62,613 crore. This better-than-expected performance triggered a sharp rally in TCS shares, pushing the entire index upwards.

Infosys, the second-largest IT firm, recorded a 7.1 per cent YoY growth in net profit, reaching Rs 6,368 crore, exceeding Bloomberg's estimate of Rs 6,248 crore. Consolidated revenue surged 3.6 per cent YoY to Rs 39,315 crore. Notably, Infosys raised its revenue growth guidance for FY24-25 to 3-4 per cent in constant currency terms, up from market expectations of 1-3 per cent.

HCL Technologies also delivered robust numbers, with net profit rising 20 per cent to Rs 4,257 crore in Q1.

Following the earnings announcements, TCS shares surged nearly 7 per cent in the last five sessions, while Infosys saw a 4.76 per cent increase, hitting a fresh 52-week high of Rs 1,843 per share. HCLTech shares jumped over 5 per cent to Rs 1,592.

Wipro on July 19 reported its June quarter net profit grew 4.6 per cent YoY to Rs 3,003 crore, beating market expectations. The company’s consolidated revenue fell 3.8 per cent to Rs 21,964 crore.

Driving Forces Behind The Growth

According to analysts, the strong quarterly performances and optimistic revenue guidance are likely to lead to a rerating of the Indian IT sector. Factors such as large deal wins, recovery in US tech spending, and strategic initiatives support this positive sentiment.

Prashanth Tapse, Senior VP- Research analyst at Mehta Equities says large deal wins, revised future guidance in anticipation of increased digital spending in western economies especially banks having the ability to spend are the key factors driving this growth.

Infosys signed a record 34 large deals in the latest quarter. Total contract value (TCV) for the large deals during the quarter stood at $4.1 billion. TCS signed large deals worth $8.3 billion.

Mohit Jain, IT analyst at Anand Rathi Institutional Equities says last year, there were concerns about Total Contract Value (TCV) not translating into actual revenue. Now, this conversion rate has improved. So, while the TCV growth might not be very high, it should contribute to better revenue growth compared to the previous fiscal year (FY 24).

“The demand scenario in the US market appears positive. Revenue-wise, the situation looks better, especially in sectors like BFSI, which have started to recover after being a drag last year,” Jain said.

Is The Worst Behind IT Sector?

K Krithivasan, chief executive officer and managing director of TCS, maintained that FY25 would be better than FY24, but said to call out on growth trends or green shoots was still too early.

“We still believe that it’s too early to call whether the growth momentum is sustainable because the market conditions continue to remain the same as it was last quarter,” said Krithivasan while addressing the media.

According to Tapse, post IT majors reporting better-than-expected expected earnings and guidance we expect the Indian IT sector is likely to see some rerating. The rationale for rerating can be attributed to gradual recovery in US tech spending which could increase more from Q2 as the nation is going towards election in November 2024.

“In price action we feel the worst is behind us and the bad news seems to priced in. The revenue growth outlook for FY25 across IT companies is likely to be marginally better with TCS & INFY majors reported in their Q1 earnings,” said Tapse.

Looking ahead, analysts remain optimistic about the long-term prospects of the Indian IT sector.

Tapse added that the IT businesses across the world are choosing India as their primary and best off-shore location and the future of the IT sector would be more focused on BFSI cybersecurity, data science, AI and giga economic growth. On overall basis, we continue to remain optimistic on a long term basis.

Brokerage firms have issued favourable comments and increased their target prices (TP) on major IT stocks post Q1 results.

The Indian IT sector's robust Q1 performances have rekindled investor optimism, driving stocks to new highs. With strong fundamentals, strategic initiatives, and favorable market conditions, the sector appears poised for sustained growth in the coming quarters.