9 out of 10 Nifty IT stocks hit 52 week high; is the investor exuberance on IT overdone? Here's what experts say

Following an over 5 per cent gain in the previous session, the Nifty IT index jumped nearly 4 per cent in intraday trade on Monday, January 15, as better than expected December quarter earnings of major IT players boosted investors' confidence about the IT stocks. The Nifty IT index reached a new 52 week peak at 37,929.30 in the session, with nine out of its 10 components TCS, Infosys, , HCL Tech, Tech Mahindra, LTIMindtree, , and L&T Technology Services simultaneously achieving their respective 52 week highs.

The robust surge in IT stocks played a pivotal role in propelling the Nifty 50 and the Sensex to attain new all time highs on Monday. Why are IT stocks rising? The Q3FY24 numbers of several Indian IT firms were not as bad as analysts had feared. Analysts expected the Q3 number of Indian IT players to be weak on uncertain demand scenarios and furloughs.

But the numbers of TCS, Infosys and HCL Tech came as a relief. Also Read: The sequential constant currency (CC) revenue performance of TCS, Infosys, HCL Technologies and Wipro were better than estimates. This gave a boost to their stock prices and raised hopes that the worst may be behind for the IT sector.

Also Read: Deepak Jasani, Head of Retail Research at observed that IT stock results have outperformed the low expectations from them so these stocks are rising after the previous underperformance. "The results of these companies reflect their focus on cost management and the medium term growth trajectory seems protected despite the recent troubles," Jasani pointed out.

Also Read: Santosh Meena, Head of Research at also highlighted that the large cap IT stocks surged despite lukewarm earnings, defying market anxieties. While results weren't stellar, they beat subdued expectations, and encouraging management outlooks fueled the rally, he said. Shrey Jain, Founder and CEO of said as Q3 numbers trickle in, investors notice IT companies’ ability to post sound growth despite a tough environment.

"Some leading names have beaten analysts’ revenue and margin estimates. Improvement in margins in some sub segments of the IT sector, the expectation of robust deal wins in 2024 due to improvement in sentiment post the US Federal Reserve meeting in December 2023, and optimistic management commentary are some of the factors that should ensure that IT stocks will continue to hog the limelight," said Jain.

CA Vatsal Vinchhi, an equity analyst for the IT sector at is of the view that large players like TCS and Infosys reported muted performance for Q3 stating macro uncertainties persist. However, better than expected results of Wipro and HCL Tech and the mentioning of signs of recovery in the demand environment resulted in an uptick of IT stocks.

Excessive excitement? Investors are actively backing IT stocks, but concerns linger. Anticipation of potential rate cuts by the US Fed in 2024 is expected to boost discretionary IT spending in the BFSI industry, a key driver for the IT sector. However, there is still uncertainty as to when the rate cuts will begin and whether the cuts will be shallow or significant.

The sector is still witnessing muted demand which was indicated by the fact that the large cap IT companies saw a drop in hiring in Q3FY24. Jasani underscored that the lack of manpower additions and smaller deal sizes of the Indian IT companies remain concerns. Moreover, the lack of recent institutional interest (especially local) also means that they are raising their ownership.

IT stocks may see some consolidation in days to come after the steep gains even though they have some valuation comfort. "While some may feel that the valuations are reaching exuberance levels, the fact that their valuations are still not high, compared to a lot of other sectors/themes, means that these stocks could now enter consolidation for a few weeks," said Jasani.

Some analysts remain positive about the IT stocks. Arvinder Singh Nanda, Senior Vice President of is of the view that the IT industry is showing signs of promise, as evidenced by the encouraging outcomes from major Companies such as Wipro, HCL Technologies, TCS and Infosys. Infosys and Tata Consultancy Services (TCS), the two biggest software exporters, surpassed analyst expectations, boosting investor confidence and driving share prices higher.

"The leading IT companies are most likely to do well. This is due to two or three factors. Interest rates are starting to decline, business expenditure is expected to increase, and their order books will rise," said Nanda. Meena believes though most IT stocks remain below historical peaks, falling US bond yields provide a favourable tailwind.

"Growth forecasts remain cautious, but the market anticipates margin improvement moving forward. Expect some profit taking after the recent surge, but dips could offer attractive buying opportunities," said Meena. Vinchhi is positive about the IT stocks for the medium to long term. "We have an optimistic outlook for FY25E with signs of stabilisation in discretionary spending and revival of consultancy business and BFSI vertical," said Vinchhi.

Jain said that the exposure to IT stocks also offers a bit of diversification so investors could consider them. "Investors worried about relatively higher valuations in the broad markets and risks associated with domestic growth stories as we move closer to the Lok Sabha elections may want to shift some money to IT stocks which derive most of their revenues overseas," said Jain.

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