The enthusiasm for information technology companies has been strengthening by the day as predictions of a resurgence in discretionary spending build, fueled by the Federal Reserve's impending rate cuts. This growing optimism has resulted in another wave of purchasing in IT equities, sending the Nifty IT index up by more than 2% to a new high of 42,712.50 on August 28. The confidence continues beyond the latest surge, as the sector's index has outperformed the benchmark Nifty 50 over the last week. During this period, the Nifty IT index increased by nearly 3%, while the Nifty 50 increased by approximately 1.3 percent.
Several experts predict a rebound in information technology equities, citing the sector's recent underperformance, which has kept valuations relatively reasonable in comparison to the inflated levels seen in much of the market. Furthermore, most IT giants' upbeat management commentary following the Q1 results, implying that the worst is behind the sector, has boosted market confidence.
In its analysis, Axis Securities stated: "Most IT companies demonstrated improved performance in Q1FY25, suggesting a revision in demand and a stabilization of uncertainties in key global economies." This optimistic perspective is shared by the industry, with contract wins and the adoption of emerging technologies like as AI (Artificial Intelligence) and IoT (Internet of Things) accelerating the sector's recovery.
Meanwhile, Fed Chair Jerome Powell hinted in his speech at the Jackson Hole Symposium that it is time for monetary policy to change, raising the prospect of a rate decrease at the central bank's forthcoming September meeting.
This impending rate decrease could increase discretionary expenditure and deal flow for IT companies. Because Indian IT companies receive the majority of their revenue from outsourcing deals with US companies, Axis Securities predicts that improving macroeconomic conditions in the world's largest economy will put the sector on track for a significant V-shaped recovery.
Sectoral gainers
IT stocks dominated the top five gainers on the Nifty 50, with LTIMindtree topping the way. Shares of LTIMindtree rose 7% after Kotak Institutional Equities upgraded the stock from'reduce' to 'add' and boosted its target price to Rs 6,200. This update came after the Karnataka High Court stayed a Rs 378-crore tax penalty against the corporation for alleged non-payment of integrated goods and services tax.
Kotak further expects that LTIMindtree would have a solid comeback in revenue growth over the next few years from the low of FY24, driven by a turnaround in spending sentiment in the BFS vertical. Other IT equities, including Infosys, Wipro, and TCS, rose 2.5-4 percent as sentiment improved for the sector.
