Shares of information technology companies spiked on optimism that easing inflation in the U.S. raised chances of a rate hike pause.
The Nifty surged 4.35% on Friday and nearly 7.6% year-to-date. All the 10 constituents of the gauge rose on Friday. While Mphasis Ltd. led with gains of more than 7%, Tata Consultancy Services Ltd. jumped about 5% and Infosys Ltd. ended over 4% higher.
The rebound underscores expectations that the U.S. Federal Reserve is approaching a rate peak as U.S. inflation rose 3% in May, its slowest pace in two years. A better corporate outlook would improve client spending, aiding Indian IT companies that generate a chunk of their business in the U.S.
What Analysts Say
“The buoyancy that we are seeing in Indian I.T. stocks today has to do, in part, with the correlation between Nasdaq and Nifty IT,” said Anmol Garg, IT analyst with DAM Capital Advisors Ltd. “But if you look at the earnings so far, that is, TCS, HCL Technologies and Wipro, they are still muted, with little to no visibility for recovery in FY24."
Apart from this, discretionary demand continues to remain under stress, according to a July 13 note by Nomura. The brokerage remains cautious on the Indian I.T. services sector and expects FY24 to likely be a year of disappointment when it comes to revenue growth. "Much-anticipated recovery of operating margin would be delayed given weak growth," it said.
Tech Mahindra Ltd., Cognizant Technology Solutions India Pvt. and Coforge Ltd. are Nomura's preferred picks in the information technology services space.
Rate hikes in the U.S. are unlikely to stop till the inflation is eased further, according to Nirmal Bang Securities Pvt. "We believe that a conclusive Fed pivot is likely only when U.S. core inflation falls to ~2%, which we think is unlikely in the next six months," it said.
Among Nifty IT constituents, shares of Tech Mahindra jumped 4.73% to hit a 52-week high of Rs 1,222.10 apiece on Friday. Coforge rose 4.43%, also to its highest in a year, at Rs 4,966.4 per share.
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