IT stocks jump up to 5%, led by midcap Coforge. Can the sector shed its 2-year underperformance?
Nifty IT index was the second best performing sector today (behind Media) in terms of percentage gains at 2.3% or 980 points with all 10 stocks trading in the green.
Other IT index constituents including LTIMindtree, Mphasis, Persistent Systems, L&T Technology Services (LTTS), Infosys, Tech Mahindra, HCL Technologies, Tata Consultancy Services and Wipro gained between 4% and 2%.
The IT sector is expected to remain in focus ahead of the Federal Reserve’s policy meeting beginning September 17. The two-day affair would end with the announcement on policy rate along with the indication of direction of the US economy.
“The IT services sector could be on the cusp of recovery after enduring a prolonged period of discretionary spending cuts. As we look ahead to the next 2-4 years, the harsh winter appears to be behind us, and the foundations for a sustained revival in the flow of business and smaller deals are being laid,” Motilal Oswal said in a note.
Nuvama has doubled-down on its positive stance on the sector and expects growth to rebound as a lower interest rate regime tamps down the macro overhang that has plagued the sector for the past two years.”We also dig deep into various facets of Gen AI, its use cases and how Indian IT would eventually benefit from the mammoth opportunity,” Nuvama added.Motilal attributed the last 2-year underperformance to the dip in growth rates due to a pause in client transformation spending after a pandemic-induced spending frenzy on cloud adoption and scalable infrastructure. Moreover, a generational shift in interest rates and inflation dynamics caught clients unaware.
Motilal has listed three key factors behind its optimism.
It sees the interest rate cuts in the US to be a key factor. Potential rate cuts could boost recovery in areas like capital markets and mortgage originations within the BFSI sector and reduce the interest burden for capital-intensive industries, allowing more funds to be allocated to technology investments, the note said.
Secondly, the evolving distribution of work between Global Capability Centers (GCCs) and service integrators will impact the recovery trajectory.
Third factor is the inflection point for ‘Moonshot’ or ‘Low-ROI’ investments. While companies have focused on short-term, high-return projects to manage costs, this has resulted in accumulating technological debt. The sector’s recovery will hinge on when and how different verticals cross their inflection points, beyond which delaying investments is not feasible, it added.
Motilal’s stocks to buy
HCL Technologies: Buy | Target: Rs 2,200 | Upside: 26%
LTIMindtree: Buy | Target: Rs 7,400 | Upside: 20%
Persistent Systems: Buy | Target: Rs 6,300 | Upside: 22%
It has also upgraded Coforge to ‘Buy’ for a target of Rs 8,100 which is a 25% upside.
Nuvama’s stocks to buy
TCS: Buy | Target: Rs 5,250
HCL Tech: Buy | Target: Rs 2,020
LTIMindtree: Buy | Target: Rs 7,700
Coforge: Buy | Target: Rs 7,500
Persistent: Buy | Target: Rs 6,500
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)
