The Nifty IT Index gained 3.4% on Friday, led by a 5% jump in TCS shares. The company posted a 12% increase in net profit in the December quarter compared to the previous year.
All 10 stocks in the Nifty IT Index closed higher. LTI Mindtree surged 4.6% while Tech Mahindra and HCL Technologies gained over 3.6% and 3.2%, respectively. Infosys and Wipro moved up 2.5% each. Infosys and HCL Tech are scheduled to announce their results next week.
“The management commentary on improving demand outlook and deal cycle along with recovery in discretionary spending is a major positive from the TCS results that led to the uptick in the shares today,” said Narendra Solanki, head, fundamental research – investment services, Anand Rathi Shares and Stockbrokers.
CLSA, which upgraded its rating on TCS to outperform from hold and raised its price target to ₹4,546 from ₹4,251, said the stock’s valuation is attractive compared to its peers and its five-year history. Morgan Stanley said the ‘risk-reward’ for the stock was favourable because of valuation.
Its peers are trading at higher valuations relative to their history, said Kumar Rakesh, IT analyst, BNP Paribas. “With margin headwinds and client issues expected to be behind the company, there is potential for growth and margin to start recovering in the coming quarters,” said Kumar.In 2024, the Nifty IT Index surged 22.8% while the benchmark Nifty Index gained 9.1%.Analysts said despite the outperformance in IT stocks in 2024, the growth pickup is not entirely priced in yet.
“The valuations in the IT sector are reasonable considering the recovery in the sector and earnings growth outperformance over the broader India market,” said Rakesh. “IT stocks are one of the few plays available to domestic investors to play the US recovery theme as well.”
Morgan Stanley said it prefers Infosys and Coforge, which “we believe have greater exposure to discretionary and short cycle work, and where chances of near-term disappointments appear low.”
Rakesh said large-cap IT stocks are likely to do better than midcap companies on the back of large deal wins, and there has been a divergence in growth performance among midcap IT companies which could persist for a couple of quarters.
“There isn’t any negative for IT stocks currently and the TCS results were the much-required tailwind for these stocks,” said Solanki. “However, investors are advised to be stock specific.”
