IT stocks: IT stocks rally as third quarter numbers lift the gloom

Mumbai: Shares of information technology companies soared on Friday, emerging as some of the biggest gainers in the day’s trading, as investors were relieved that December quarter earnings of the sector giants-TCS and Infosys-and their management commentaries were not as gloomy as they were expecting.

Infosys shares surged 8.08% to close at Rs 1,615 on Friday and TCS shares gained 3.92% to close at Rs 3,881.90. Wipro advanced almost 4%, while Tech Mahindra, HCL Tech and LTI Mindtree gained between 4.5% and 5% each.

“Both TCS and Infosys have reported marginally better earnings compared to the muted investor expectations which has led to the rally,” said Sumit Pokharna, VP and IT analyst, Kotak Securities. “The management guidance is also optimistic despite the pressure on discretionary spending.”

After the results, analysts at top brokerages did not rush to upgrade their ratings on both the stocks. Some of them marginally raised their price targets on Infosys. The average analyst target price on Bloomberg for Infosys stood at Rs 1,639.77, while TCS stood at Rs 3,962.43.

On Friday, the Nifty IT Index zoomed 5.1% to 36,521.70, helping the stock benchmarks-Nifty and Sensex-advance over 1% each.Analysts said gains in IT stocks were driven by liquidation of bearish derivative bets created in anticipation of weak third quarter earnings. The rally in Nifty IT stocks after four weeks of sideways moves has ended up in a breakout.

If index sustains above 36,100 levels, this rally can extend and move towards 37,000 levels in the next couple of weeks, said Rajesh Palviya, senior vice president research – technical and derivatives, Axis Securities.”Both stocks (Infosys and TCS) have witnessed a breakout of resistance area and crossed call concentration area as well,” he said. “This spurred a short covering action in the markets leading to a long buildup.”

Net profit of Infosys fell 7.3% to ‘6,106 crore in the December quarter from a year ago, while slashing its full year revenue guidance. TCS posted a net profit of ‘11,058 crore, up 2% from the same period a year ago.

Analysts said though the next couple quarters are likely to remain weak, recovery can be expected from the second half of 2024.

“The deal pipeline is strong for both TCS and Infosys, which is likely to convert into order books in the upcoming quarters,” said Sneha Poddar, associate vice president- equity research, Motilal Oswal.”The discretionary spending is likely to pick up when the US Fed cuts interest rate.”

Pokharna said that Infosys is likely to benefit the most if demand outlook improves and FY25 is expected to be better than FY24.

Analysts said that if companies post similar earnings in the next quarter, it would be a strong signal for investors that the trajectory for the IT sector over the long term is strong, supported by the likelihood of rate cuts by the US Fed.

“Since there is nothing negative about the fundamentals of the IT sector, other companies are also likely to deliver better results and sustain the momentum,” said Palviya. “A 5-6% rally is likely in the next couple of weeks.”

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