IT shares in focus; TCS hits 9-mth high; Tech Mahindra surges 11% in 2 days

Thus far in calendar year 2023, the Nifty IT index has outperformed the market by surging 10 per cent, as compared to 0.55 per cent decline in the Nifty 50

Shares of information technology (IT) companies were buzzing on Thursday, with sector giant Tata Consultancy Services (TCS) hitting a nine-month high, and Tech Mahindra surging 4 per cent on the National Stock Exchange (NSE) in the intra-day trade.

At 10:42 am, the Nifty IT index was the top sectoral gainer, up 1.8 per cent on the NSE, as compared to 0.50 per cent rise in the Nifty 50. Tech Mahindra, Mphasis, and L&T Technology Services (LTTS) were up 4 per cent. LTI Mindtree, Persistent Systems, TCS, Wipro, Infosys, and HCL Technologies, meanwhile, rose in the range of 1 per cent to 3 per cent.

Thus far in calendar year 2023, the index has outperformed the market by surging 10 per cent as compared to 0.55 per cent decline in the Nifty 50.

The Indian IT, and the US-based Nasdaq indices have been correlated in the past, but there have been some disparate moves recently as Indian IT has outperformed. For 2023, this is a good position for Indian IT to start as if the Nasdaq recovers. It should have a neutral to positive impact on Indian IT. Also, broadly most funds are underweight on Indian IT, providing downside risk protection, according to analysts at HSBC Securities.

"In our view, if the top-5 (TCS, Cognizant, Infosys, HCL Tech and Wipro) companies have to grow 8 per cent in FY24, around 4-5 per cent will come from market share gains and rest from growth in tech budgets. So we believe it's fair to conclude that if the macro-economic outlook remains uncertain or slows down further, then we would likely see companies growing at only 5 per cent in FY24. However, we do expect business and tech spend optimism to revive in a soft-landing scenario and the IT sector to still grow at a 8 per cent CAGR over FY24/25," the brokerage firm said in Indian IT Services sector report.

Meanwhile, among individual stocks, TCS was up 1.4 per cent at Rs 3,568 on the NSE. The stock was trading at its highest level since April 29, 2022.

TCS bucked the trend in the December quarter (Q3FY23) by delivering revenue growth ahead of what the Street was expecting. Sequentially, TCS's revenue was up 5.2 per cent. The company reported 2.2 per cent quarter on quarter (QoQ) constant currency (CC) growth for Q3 while dollar revenue growth was 2.9 per cent QoQ. Ebit margin improved 50 bps QoQ at 24.5 per cent.

Analysts at ICICI Securities expect the company's margins to improve from FY23 onwards due to utilization improvement, moderation of sub-contractor costs. The brokerage builds in margin expansion of 110 bps over FY23-25.

Motilal Oswal Financial Services, too, believes TCS, among their IT services coverage, is the best positioned to ride out the near-term moderation in technology spending, on account of macroeconomic stress in developed economies.

Meanwhile, shares of Tech Mahindra were up 4.5 per cent to Rs 1,119, surging 11 per cent in the past two trading days. Tech Mahindra’s net new deal wins were robust with a total contract value (TCV) of $795 million in Q3, despite a cautious approach by clients, and slower decision-making. Extended furloughs in January, weaker flow of smaller deals, and softness in the top-5 clients and certain industries like Hi-Tech are expected to weigh on near-term growth, analysts at Emkay Global Financial Services said in result update.

However, the company’s management remained confident about its plans to expand margins, considering the progress made on pyramid rationalization, offshoring shift, subcontracting costs optimization, portfolio pruning, synergy realization with portfolio companies, and operational rigor, the brokerage firm said. It maintains a 'buy' rating on the stock with a target price of Rs 1,220 per share.