Nifty IT up 5% in November; why are IT stocks rising? Should you bet on the sector?

The Nifty IT index has outperformed the benchmark Nifty 50 this year. The IT index has gained about 13 per cent this year so far while the benchmark index Nifty 50 is up over 9 per cent. In November so far, the Nifty IT index is up over 5 per cent while Nifty 50 is up about 4 per cent.

IT stocks have gained in the recent past on expectations that the US Fed is done with rate hikes amid easing inflation and a cooling labour market. The US is a key market for major Indian IT services companies and they earn a significant part of their revenue from the US.

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Why are IT stocks rising?

Manoj Dalmia of Proficient Group of Companies observed that the Nifty IT index is up over 5 per cent this week after the recent softening of inflation in the United States has raised hopes that the Federal Reserve will soon end its cycle of interest rate hikes, which has been a drag on IT stocks. In addition, Dalmia pointed out that IT companies reported decent earnings in recent quarters, and there is optimism that the sector will continue to grow in the coming years.

Arvinder Singh Nanda, Senior Vice President at Master Capital Services observed the Nifty IT index price has executed a decisive reversal in the proximity of the 50 per cent retracement level from its preceding surge, indicating a price trajectory toward retesting the recent peak established in September this year.

“According to price action theory, a visible W pattern has manifested on the weekly chart, affirming the continuation of a bullish trend in the near term. The robust gain in the IT index is attributed to strong buying activity in heavyweight stocks such as Infosys and TCS, collectively accounting for a substantial weightage of approximately 27.07 per cent, and 25.83 per cent respectively in the IT index,” said Nanda.

Investors appear to be believing that the worst for the IT sector is behind.

Shrey Jain, Founder and CEO of SAS Online underscored valuations of IT stocks are reasonable given the expectation of double-digit earnings growth in FY24-25.

Moreover, recent data in the US made it clear that inflation is falling and there are early signs of a slowdown in economic activity. That indicates a case for a cut in interest rates in the first half of 2024 in the US. This should revive tech spending by corporates next year. Also, demand for new-age technology-based solutions and a strong deal pipeline should help Indian IT companies, Jain underscored.

CA Vatsal Vinchhi, Equity Analyst of the IT sector at Choice Equity Broking also pointed out that the IT stocks have jumped significantly in the last few trading sessions because of lower-than-expected US inflation which could revive tech spending in the US. Also, the valuations are seen as fair because of downgrading in earlier quarters due to the global slowdown and delay in discretionary spending.

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Avdhut Bagkar, Derivatives & Technical Analyst at StoxBox pointed out that the Nifty IT index has conquered the 50-simple moving average (SMA) after 20 volatile sessions, recouping the positive strength.

“If the current momentum succeeds in maintaining the upward bias, the index could set a new all-time high from a medium-term perspective,” said Bagkar.

“Stocks like HCL Tech and Persistent Systems have already reached a new historic peak, propelling a leader position in the IT segment. Both of these stocks have moved into new territories following a robust accumulation and building a resilient support base. HCL Tech is headed towards ₹1,500, while Persistent Systems could see a gradual move to ₹7,000 level. Coforge is another stock poised to hit a new historic peak, and once that occurs, a fresh up-move towards ₹6,000 cannot be neglected. Wipro continues to trade with sluggish bias and needs to scale significant highs to regain the losing sentiment,” Bagkar said.

Should you bet on IT stocks?

Dalmia said the jump in IT stocks is a welcome sign for investors, as the sector has been underperforming for much of the year. However, it is important to remember that IT stocks are still relatively expensive, and there is some risk that the sector could pull back in the short term.

“We believe that the recent rally in IT stocks is a positive development, and we would recommend that investors consider adding some exposure to the sector for the long run, with caution of course,” Dalmia said.

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Jain believes investors should accumulate frontline IT stocks on dips.

“Traders should however be nimble-footed. After testing vital support of 30,000 on October 26, 2023, the Nifty IT index has moved up to close above the crucial reading of 50DEMA (daily exponential moving average) on charts. If the index stays above that level for a week, then the upside opens with a target of 33,400 in the short term,” said Jain.

Vinchhi underscored that IT companies are cautious in FY24E due to weak demand while the outlook for FY25E remains strong due to a robust deal pipeline with GenAI participating in revenue growth.

Vinchhi believes large players might see double-digit growth with healthy margins in FY25E and hence one should accumulate on dips.

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Disclaimer: The views and recommendations above are those of individual analysts, experts and broking companies, not of Mint. We advise investors to check with certified experts before making any investment decisions.

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Updated: 17 Nov 2023, 01:35 PM IST