Indian IT shares log best day in 3 years on easing rate worries, strong deal pipeline

Shares of Indian information technology companies surged 4.5% on Friday, in their biggest one-day jump since September 2020, boosted by strong deal pipelines and rising expectations of an imminent pause in US rate hikes.

The Nifty IT stocks have lagged the blue-chip indexes for a large part of the year due to worries that clients would cut spending, especially in the key US market after the collapse of Silicon Valley Bank and as the Federal Reserve showed no signs of backing off rate hikes.

However, US inflation data on Wednesday bolstered hopes that the Fed could end rate hikes after July. That same day Tata Consultancy Services reported a roughly 24% jump in its order book, while a day later, Wipro reported a 9% increase in large orders.

"Hopes of a stronger performance and growth recovery in the second half of fiscal 2024 and U.S. macro indicators looking more favourable could be among a combination of factors that are driving IT stocks up, "said Apurva Prasad, Vice President - Institutional Research at HDFC Securities.

Though their results were tepid and the companies warned of uncertain near-term demand, analysts said the bad news was largely expected.

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"Poor results were priced in to a certain extent after multiple downgrades in the last few weeks," said Amit Kumar Gupta, founder of advisory and brokerage firm Fintrekk Capital.

He said the index's 6.3% surge in the last two days was mostly a relief rally or traders covering short positions.

Indeed, until two days back, IT stocks were largely flat since mid-March, when SVB's collapse sparked concerns about the health of other financial companies, which are key clients for IT companies.

But both TCS and Wipro recently said that large deal momentum was mostly intact, boosting hopes of growth recovering later this year.

"Given that cuts in discretionary spending will likely slow revenue in FY24 – this is known and priced in – we expect the sector's growth to bounce back in FY25 with a sustainable strong demand environment," Nuvama analysts said in a note.

"We see strong earnings growth over the next three years."