Infosys, TCS, Wipro, HCL Tech, TechM: Why are IT shares rallying?

Tata Consultancy Services Ltd (TCS), Infosys Ltd, Wipro Ltd, Tech Mahindra Ltd and HCL Technologies have rallied up to 14 per cent in the last one month despite negative commentary over the second outlook in the light of discretionary spends amid slowing major markets of the US and the EU.

What has calmed investor nerves of late is easing of 10-year bond yields in the US, which has fallen from 5 per cent to nearly 3.9 per cent in the last two months and its likely impact on consuming spending. This Nirmal Bang Institutional Equities said has led to the feeling that worst is behind for the Indian IT Services sector.

"The jury is still out whether we will see a no/soft landing or a shallow/deep recession in 2024," the brokerage said.

A CNBC's US survey pre-FOMC meet suggested that 40 per cent of surveyed economists expected the US to go into some form of recession in the next 12 months. Consensus economic Bloomberg forecasts put the probability of a US recession at 50 per cent.

"If a significant slowdown of economic activity is not witnessed in the US in the next 12 months after such an aggressive tightening of monetary policy, it will be one of the rare instances that this would have happened in recent US economic history. The significant expansion of fiscal deficit in FY23 and probably its sustenance into FY24 may be a contributory factor to a no/soft landing if one happens," Nirmal Bang said.

TCS shares are up 10.35 per cent for the one-month period. Infosys shares are up 9.37 per cent for the same period. Wipro has climbed 12.44 per cent, HCL Tech 13.83 per cent and TechM 8.13 per cent.

The brokerage though see pressure ahead. The brokerage said it met or spoke to eight out of nine IT firms under its active coverage and the key highlights included that the weak demand conditions of H1FY24 continued in the December quarter with no incremental deterioration/improvement.

"Many refrained from discussing Q4FY24 let alone 2024, most expect higher furloughs whereas some expect furloughs to be normal while mega deal/large deal announcements have been materially fewer in Q3FY24 compared to 2QFY24, it was indicated that deal signings tend to be lumpy and are vulnerable to shifts across quarters. Pipeline is still indicated to be robust," Nirmal Bang said.

The domestic brokerage said that the CEO of one the largest firms indicated that conversations at the beginning of the quarter were focused on cost take-outs. He said it is too early to assess the impact of recent decrease in 10-year yields on corporate spending, Nirmal Bang said.  

What lies ahead?

 

For 3QFY24, among the Tier-1 players, Nirmal Bang said that except HCL Tech -- which will likely see 3-4 per cent QoQ CC growth due to start of the Verizon contract from 1st November and extra months of ASAP acquisition and continued revival in the ERDS business --- the rest will likely see flat to negative growth.

It noted that some IT firms that had postponed salary hikes by 3-7 months will be taking them in the December quarter. While the hikes are going to be muted and are likely applicable to smaller set of employees, this could put some pressure in a quarter where revenue growth will be weak, it said. Nirmal Bang expects most players to continue to shed staff in the December quarter too due to weak demand and excessive hiring of the past.

"We think a clear view (if at all) on FY25 or 2024 may only be obtained post the March 2024 results season. Accenture’s (ACN) guidance for 2QFY24 and guidance revision for FY24 (YE August), if any – to be announced on 19th December, 2023 – will be the earliest data point which could indicate if the industry cycle is turning. Its views on discretionary spending will be keenly watched. Accenture’s 1QFY24 guidance (Points to a ‘slower for longer’ demand) had implied both QoQ as well as YoY decline on an organic growth basis," Nirmal Bang said.

 

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