The shares of Indian Information Technology (IT) stocks are on a roll – most of them have given double-digit returns in the past few months. After a dry couple of years, the IT stocks are seeing momentum. Do you own IT stocks or plan to invest in them? In either case, you need to understand the reasons behind the rally and whether the rally will sustain or not. In this article, we will discuss everything you must know about IT Sector stocks and will the rally continue?
IT Sector Performance
In the last week (ending 13 July), the Nifty IT index has increased by 4.53%. Compared with the 4.71% returns of Nifty50 (one month), the Nifty IT index has jumped by 12.15%. In the one year, the gains made by investors are over 30%. In the 5-year time frame, the returns are 149% despite the muted 2021-2023 for IT stocks.
What stocks are part of the Nifty IT index?
Above, we have discussed the returns of the Nifty IT index, but before we move forward, it is vital to understand what stocks are included in the index. Below is the table showing different stocks, their weightage, and free float market cap in thousand crore.
Disclaimer: Please note that the stocks mentioned above are provided solely for educational purposes. We do not endorse or recommend any of these stocks without thorough independent research.
As you can see in the table above, Infosys and TCS alone constitute over 50% weightage in the index. It won’t be wrong to say that they drive the IT index. The top 5 companies form nearly 80% of the index.
Why are IT stock prices increasing?
With the basics covered, it is time to answer the most essential question – why have IT stocks India prices increased recently? Many positives have happened, and below are the top reasons for the rally:
Accenture’s Result: Accenture is not listed on the Indian stock exchanges. However, it is the first company in the US to release its results and set the tone for Indian IT companies. In its recent result, Accenture reported healthy new bookings and revenue growth. It suggests that the global demand for IT services remains strong, which bodes well for Indian IT companies that cater to similar clientele. A positive outlook from Accenture, especially regarding areas like strategy and consulting returning to growth, can be interpreted as a sign of a potential turnaround for the broader IT services industry.
Positive Earnings Reports: IT companies like TCS and HCL recently reported strong quarterly earnings, exceeding analyst expectations. Now, it is expected that other IT companies will do the same. Hence, we are seeing a rally in most IT stocks as positive financial performance highlights the sector’s resilience and growth potential, attracting investor interest.
Rate Cut by Fed Soon: The Federal Reserve in the US controls interest rates, which significantly impacts investment decisions. When inflation is high, the Fed typically raises interest rates to curb inflation. Higher interest rates make borrowing more expensive, potentially leading investors to move away from riskier assets like stocks and towards safer options like bonds. The inflation numbers have dropped in the US. And it reduces the pressure on the Federal Reserve to raise interest rates. This lowers the risk of borrowing costs increasing, making stocks, including IT stocks (growth stocks – potential for above-average earnings growth), a more attractive investment option.
Relative Undervaluation: As mentioned earlier, IT stocks were underperforming before the recent rally. Most companies in the IT sectors were available at a fair valuation, which is gold when the overall market is trading at a premium. For example, Infosys’ median PE is 26.5 over the last decade. In April 2024, it was trading at 22.4 PE. Once the outlook changed to positive, investors grabbed the buying opportunity.
Global Digital Transformation: The global focus on digital transformation across industries has led to a surge in demand for IT services offered by Indian companies. Their expertise in areas like cloud computing, artificial intelligence, and cybersecurity is highly sought-after.
Will the rally continue?
We have already seen that the IT sector shares has outperformed the broader index like Nifty50. It is a valid concern if you are skeptical whether the sector’s steam is exhausted. Though it is tough to predict with high accuracy whether the rally will continue (unless you use an AI tool like Jarvis Invest), we give you pointers that can help you determine whether the rally will continue or the rally is over.
The rally will continue if the below factors support:
- Strong Fundamentals: HCL and TCS have given a positive outlook for FY25, and if other IT companies also project a positive outlook for FY25, then for sure, the rally will continue. Also, a lot will depend on the current (Q1FY25) results.
- Attractive Valuations: Compared to some other sectors, IT stocks might still be seen as undervalued, potentially attracting investors seeking growth at a reasonable price.
- Global Demand Tailwinds: The global focus on digital transformation continues to drive demand for IT services, benefiting Indian companies with expertise in relevant areas.
- Positive Broader Market Sentiment: The overall Indian stock market is experiencing a positive run, which can also influence investor sentiment toward IT stocks.
Factors that could act as a show-stopper to the rally are as below:
- Market Volatility: Stock markets are inherently volatile, and unforeseen events or corrections could impact the IT sector’s performance.
- Interest Rate Changes: Potential future interest rate hikes (the chances of which are low) or delays in the interest rate cut by the US Fed and RBI could lead investors to shift towards other asset classes, impacting best it stocks in India.
- Currency Fluctuations: A stronger Rupee could make Indian IT exports slightly less competitive in the global market.
Conclusion: What should you do?
The recent rally in the Indian IT sector has been driven by positive factors, as seen above. However, market dynamics can change rapidly. You should conduct thorough research, understand the associated risks, and maintain a long-term perspective when navigating the sector. Alternatively, if you want to make returns in the short term, explore Jarvis Invest’s One Stock service that helps you book short term profits with a smaller amount, making the most of such rallies.