Nifty IT in Momentum- Is The Worst Behind for IT Stocks?

Nifty IT started the September month with a new 52-week-high as Q1FY25 earnings remained in line with D-street expectations alongside robust deal wins. As for now, much remains dependent on the impact of the projected rate cuts by the Fed. Investors are eagerly looking for cues as major IT stocks continue to experience an uptrend, even as broader markets remain in a range-bound mood.

For instance, industry heavyweight, Infosys, witnessed a surge of more than 35 per cent in just 3 months. Shares of TCS followed a similar trail during the same period.

Also read: After a Long Wait: US Fed and RBI Rate Cuts in Sight– What This Means for Investors

Last month, benchmark indices remained relatively flat as volatility in global markets took the better of D-street investors. However, Nifty IT was able to deliver a modest return of more than 5 per cent.

On year-to-date basis, Nifty IT has delivered a return of more than 20 per cent, outpacing Nifty50 returns, which stood at around 16 per cent.

Most IT companies have shown improved performance in Q1FY25, indicating a revision in demand and stabilisation of uncertainties in major global economies, as per a report by Axis Securities.

A larger bounce-back

IT stocks witnessed a steep decline in the April-May period due to concerns over weak demand from major markets like the US and Europe. This was primarily due to conservative tech spending by BFSI clients in the West, according to multiple reports. However, as geopolitical tensions cooled off and the larger economic picture got a bit clearer, the reversal in trend was observed albeit at a slow pace.

D-street analysts believe that H2FY25 would fare better than H1FY25 on account of improving demand environment, robust deal wins, easing pressures on the supply side and lower base.

"The outlook for IT sector remains positive. Our sense is that most of the negatives in the sector are seemingly priced in and the expected interest rate cut in the US would further support discretionary spending going ahead," said Manish Chowdhury, Head of Research, StoxBox.

Meanwhile, the growing hype around AI and the developing opportunities around the same coupled with the potential rate cut by the Federal Reserve can further boost investor confidence.

While a lot seems to go in-favour of the IT sector, investors must keep in mind that there are still potential risks ahead.

"IT companies in Q1 have demonstrated better performance. We believe the sector will likely witness a rapid recovery as broader conditions improve. However, discretionary spending continues to be weak due to persistent macroeconomic worries," said Anil Rego- Founder and Fund Manager at Right Horizons PMS.

It wasn't just the discretionary spending that took a hit, margin performance was also mixed in the last quarter. Among the top tech companies, Wipro stood out with strong execution and better margins, while Tech Mahindra's margins recovered at a much slower pace from the low points they hit in FY24.

Wage hikes across most IT services companies impacted margins for the quarter. Even Tier-2 IT companies, which maintained or improved margins from FY20-23 through superior growth, faced margin pressures in FY24, the brokerage firm said in its report.

Despite the current challenges, the long-term outlook looks promising owing to signs of a broader economic recovery. A much clear-cut picture is expected to emerge in the second half of FY25, as analysts expect strong revenue growth during the period.