IT stocks rally up to 4% as an early indicator of Q1 earnings just gave green signals

Shares of India’s software services exporters on Friday rallied up to 4% during the day as quarterly results of global peer Accenture had a few positive elements such as strong bookings growth and acceleration in growth rates.

Shares of Persistent Systems was the top gainer as it rallied over 4% to day’s high of Rs 4,065 on BSE. Other IT stocks like Coforge, LTIMindtree, Infosys, TCS and LTTS were also trading around 2% higher during the day. As a result, the Nifty IT index was also trading around 2% higher.

Accenture’s Q3 FY24 revenue growth of 1.4% in CC terms was slightly above the mid-point of its adjusted guidance band. The management commentary on demand environment was largely unchanged, with clients continuing to limit discretionary spending and the delay in decision-making persisting, particularly for smaller deals. However, the company maintained the mid-point of its guidance; this points to a broadly stable demand environment.

“Also, Q4 guidance of 2-6% growth in LC indicates a steady FY24 exit. The stability bodes well for Indian IT companies, even as a full-fledged recovery is now expected in CY25/FY26. We expect the start of the interest rate-cut cycle to act as a signalling trigger for clients, to gain confidence on the inflation trajectory and macro stability, which may drive demand recovery and an uptick in discretionary spending,” Emkay analyst Dipeshkumar Mehta said.

He expects IT stocks’ earnings downgrade to bottom out in H1FY25, if current expectations on interest rate cut materialise.Also read | Rs 7 lakh crore profit in 10 days! Why PSU stocks are rallying like Modi managed ‘400 paar’

Nuvama analysts noted that Accenture management called out two positive read-acrosses for Indian IT companies – consulting to return to growth in Q4 and bookings-to-revenue conversion gradually improving.

“Both these are incrementally positive for Indian IT companies. Indian IT Services companies have been reeling under the low deals-to-revenue conversion, and any signs of that improving is positive. Also, we believe FY25 Street estimates for Indian IT Services companies have been adequately rationalised, and they face little downgrade risk from current levels. We maintain our positive stance on the sector, and expect a sustainable strong demand environment to drive healthy earnings growth over the next three years,” Nuvama said.

Accenture has tightened its FY24 revenue growth guidance to 1.5-2.5% from 1.0-3.0% in cc terms. The company also noted that while the industry’s long-term technology spending trends remain intact, client cautiousness due to macro uncertainties is weighing on tech spending in the near term.

Indian IT stocks have largely held firm despite a muted demand environment for the past several quarters.

“While stock prices of Accenture, EPAM, Globant and Endava have gone up post Accenture’s results, do note that multiples for such stocks de-rated considerably unlike Indian IT. Accenture is still down 11-

12% CY2024 YTD despite the strong up-move. Strong bookings numbers and

acceleration in growth rates from a decline to a positive aided by inorganic growth may spur some excitement given the buoyancy of the sector on any positive indications on demand,” Kotak Equities said.

Nomura analysts have also maintained a cautious stance saying that discretionary demand is unlikely to recover meaningfully in FY25 for India IT.

“While revenue growth for largecaps should improve in FY25 (+2.9% y-y) vs FY24F (+1.3% y-y), we expect it to be driven by cost take-out deals. We expect operating performance to vary across our coverage universe in FY25-26,” Nomura said.

Which IT stocks to buy?

Emkay’s pecking order is Infosys, HCLT Tech, Wipro, Tech Mahindra, TCS and LTIMindtree in largecaps.

Nomura has buy ratings on TechMahindra, Coforge, Birlasoft and eClerx.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)

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