IT stocks take flight on dovish Fed, but long-term view hazy
Informist, Thursday, Dec 14, 2023
By Akshata Gorde
MUMBAI – The Nifty IT index clocked its highest single-day gain in five months today, with its constituents rising 2-7%, after the US Federal Reserve's dovish commentary raised hopes of a revival in discretionary spending on information technology by clients of Indian IT companies, which would lead to recovery in their earnings growth. Cheap valuations also prompted investors to flock to IT stocks.
On Wednesday, the US Federal Open Market Committee kept the Federal funds target range unchanged at 5.25-5.50% for the third consecutive meeting, and guiding for 75 basis points rate cuts by the end of 2024.
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The Nifty IT index rose as much as 3.8% to a 20-month high of 34308.55 points, its highest intraday gain since Jul 14. The index closed 3.5% higher at 34223.35 points, with shares of Coforge, HCLTech and Persistent Systems hitting lifetime highs.
Analysts see 34900 points as the immediate resistance for the index, followed by 35470 points. Support is seen at 33400 points, below which there is a buying opportunity for investors, said Nandish Shah, senior derivatives analyst and assistant vice president of retail research at HDFC Securities.
The Fed's dovish comments cheered global and domestic investors, which pushed the domestic benchmark share indices to record intraday as well as closing highs today. The Nifty 50 index closed 1.2% higher at 21182.70 points, after hitting a record high of 21210.90 points.
The IT sector has been struggling with poor earnings for the past three quarters as the global slowdown and high interest rates prompted clients, largely in banking and financial services, to cut discretionary technology spending. This also led to a correction in valuations of IT stocks, making them reasonable at a time when the overall market was overbought, said analysts.
Even after today's rally, the forward price-to-earnings multiple for the Nifty IT constituents was 21 to 46, with the highest being for Persistent Systems, followed by Coforge and L&T Technologies at 41.
"The market is anticipating that eventually banks (major clients of IT companies) will be out of the woods, and the pain that they've seen will mild down," said Sumit Pokharna, vice-president of research at Kotak Securities. "So the market is enjoying that in advance."
However, he warns that investors should wait for at least one quarter for more clarity on demand and earnings trajectory from a long-term investment perspective. However, on a short-term basis, momentum gains are possible because of cheaper valuations.
"Right now the momentum is very positive, people (investors) are putting money in whatever is comparatively cheaper," Pokharna said.
These trigger-based gains are expected to wear off and stocks will likely move sideways until companies start seeing actual growth, said Pankaj Karde, the president and head of institutional equities at Asit C Mehta Investment Intermediates. He pointed out that IT companies are likely to see "multiple expansions" along with earnings growth as they start getting strong deal wins.
Pokharna is also of a similar view. He expects growth to recover in two more quarters, but warns of a potential threat from global capability centres. These are offshore units of multinational corporations that operate across the globe, reducing their outsourcing needs from IT companies.
After remaining distant from the market for two months, foreign institutional investors turned net buyers of Indian equities in November and market participants believe that FII flows into IT stocks could further support the long-term view of domestic investors.
"Till foreign institutional investors start taking huge bets on these stocks, Indians won't follow," Karde said. Though he expects FIIs to invest, whether they're underweight or overweight on IT stocks needs to be looked at, he said.
Brijesh Ail, a technical and derivative analyst at IDBI Capital, said he doesn't expect profit booking in IT stocks just yet.
The dovish commentary of the US Fed may have brought relief to shares of IT companies for now, but the jury is still out on long-term bets. End
