On Thursday, the information technology (IT) sector witnessed a surge in stock prices, with Tata Consultancy Services (TCS), a major player in the industry, reaching a nine-month high. Additionally, Tech Mahindra saw a 4% increase in its share price during intra-day trading on the National Stock Exchange (NSE).
The Nifty IT index, which represents the IT sector, was the top gainer among other sectors, rising by 1.8% on the NSE, as compared to a 0.50% increase in the Nifty 50. Specifically, Tech Mahindra, Mphasis, and L&T Technology Services (LTTS) experienced a 4% increase in their share prices.
During the recent trading period, LTI Mindtree, Persistent Systems, TCS, Wipro IT Firm, Infosys, and HCL Technologies witnessed an increase in their stock prices ranging from 1 to 3 per cent. In contrast, the Nifty 50 experienced a decline of 0.55 percent. In the current calendar year of 2023, the aforementioned index has exhibited a noteworthy performance by demonstrating a surge of 10 percent, thereby outperforming the overall market.
In the past, there has been a correlation between Indian IT and US-based Nasdaq indices, but recently there have been some divergent movements as Indian IT has performed better. As we begin 2023, this puts Indian IT in a favorable position because if the Nasdaq bounces back, it is likely to have a neutral to positive effect on Indian IT.
According to analysts at HSBC Securities, most funds have a lower allocation to Indian IT, which provides protection against downside risks. The top 5 companies in the Indian IT sector, namely Tata Consultancy Services TCS, Cognizant, Infosys, HCL Tech, and Wipro, are expected to achieve an 8% growth rate in FY24, of which 4-5% is anticipated to come from market share gains, and the remaining percentage will be derived from growth in technology budgets.
It can be concluded that if the macroeconomic outlook continues to be uncertain or experiences further slowdown, companies are expected to grow at only 5% in FY24. However, if there is a soft-landing scenario, where business and technology spending optimism picks up, it is expected that the IT sector will still grow at an 8% compound annual growth rate (CAGR) over FY 24/25, as stated by the brokerage firm in their report on the Indian IT Services sector.
The stock of TCS rose by 1.4% to reach Rs 3,568 on the NSE, which is its highest level since April 29, 2022. This was in contrast to the overall trend in the December quarter (Q3FY23), where TCS outperformed market expectations by achieving revenue growth of 5.2% sequentially. The company’s QoQ constant currency (CC) growth was 2.2% while dollar revenue growth was 2.9% QoQ. Additionally, the Ebit margin saw a QoQ improvement of 50 bps at 24.5%. Analysts from ICICI Securities predict that TCS’s margins will continue to improve from FY23 due to increased utilization and lower subcontractor costs.
The brokerage firm expects a 110 basis point increase in margin expansion between the years 2023 and 2025. Motilal Oswal Financial Services considers TCS, among the IT services they cover, to be in the best position to handle the short-term decline in technology spending due to economic difficulties in developed countries. Meanwhile, Tech Mahindra’s stock price rose by 4.5% to reach Rs 1,119, a growth of 11% over the past two trading days. Despite client caution and slower decision-making, Tech Mahindra’s net new deal wins were strong, with a total contract value (TCV) of $795 million in Q3.
According to analysts at Emkay Global Financial Services, the company is expected to experience a slowdown in its near-term growth due to extended furloughs in January, a weaker flow of smaller deals, and softness in the top-5 clients and certain industries such as Hi-Tech. However, the company’s management remains confident in its plans to increase margins, which include pyramid rationalization, shifting offshore, optimizing subcontracting costs, pruning portfolios, realizing synergies with portfolio companies, and improving operational efficiency. Despite these challenges, the brokerage firm maintains its ‘buy’ rating on the stock with a target price of Rs 1,220 per share.
