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Revival in IT Stocks Likely to Continue in New Year

Analysis of Positive Outlook for Indian IT Stocks in 2023 Based on Easing US Recession Fears

Analysis for Layman

The article discusses the improved outlook for Indian IT stocks due to recent developments in the US economy. Previously, concerns about a potential US recession had weighed down the valuations of Indian IT companies, which rely heavily on revenue from the US market.

However, the US Federal Reserve has indicated that it plans to lower interest rates in 2024. This is seen as a signal of a “soft landing” for the US economy, reducing the risks of a significant downturn. This, in turn, has boosted investor confidence in Indian IT stocks. Companies like TCS, Infosys, and HCL Tech have seen their stock prices rise by 3-7% following this announcement.

While near-term growth guidance remains cautious, the outlook is positive due to healthy deal wins. Accenture’s strong performance in terms of deal wins and the robust pipeline for Indian IT firms suggest that discretionary tech spending may rebound with lower interest rates.

Revival in IT Stocks Likely to Continue in New Year

Impact on Retail Investors

For retail investors, the improved outlook for Indian IT stocks in 2023 is a positive development. The valuations of these stocks had become attractive, considering their strong medium-term prospects. It is advisable for investors to consider accumulating quality IT stocks when the market experiences dips.

However, it is essential to monitor the stability of US economic growth over the coming quarters. Additionally, keep an eye on the Federal Reserve’s interest rate decisions and the outlook for IT spending from major US and EU clients during the earnings season. Investor sentiment can be influenced by management commentary and the momentum of deal wins. The macroeconomic environment still carries a level of volatility.

Impact on Industries

The IT sector is directly influenced by expectations of robust US economic growth and increased tech spending. Tier I companies like TCS, Infosys, Wipro, and leading mid-cap companies such as LTI and Persistent Systems could experience a re-rating as their growth prospects improve. These stocks may continue the uptrend that started in mid-November 2022.

Sectors where IT spending is crucial, such as banking, retail, and manufacturing, may accelerate their digital investments. Businesses across software services, platform companies, and providers of Salesforce solutions would also benefit from the optimistic outlook in key Western markets. Names like Intellect Design, eClerx Services, and Sonata Software could see increased support.

Long Term Impact

In the long term, the easing of global macroeconomic uncertainty supports discretionary tech spending by enterprises. This, in turn, sustains the multi-year double-digit growth outlook for Indian IT vendors. Valuations for quality IT companies may further expand as the risks of a US/EU recession diminish over the next two years.

Short Term Impact

However, in the short term, market sentiment may remain choppy due to ongoing developments related to inflation trends and Federal Reserve rate forecasts, which still bring uncertainty. The IT sector’s close ties to global monetary policies mean that stock volatility could persist over the next 2-3 quarters. It is crucial to avoid making aggressive investments and instead maintain exposure through a staggered approach in the current environment.

Potential Impact of Continued IT Stock Revival in New Year

Based on the provided information, we can analyze potential winners and losers in the IT sector, both Indian and global, under the assumption that the US Fed’s dovish outlook persists:

Indian Companies Likely to Gain:

  • Large-Cap IT Players: Companies like TCS, Infosys, HCL Technologies, and LTIM rose 3-7% after the Fed’s meeting and could continue seeing increased investor interest due to their:
    • Strong track records of deal wins and revenue growth.
    • Diversified client bases and exposure to multiple revenue streams.
    • Potential benefit from increased IT spending by US corporates due to lower borrowing costs.
  • Mid-Cap IT Companies: Companies like Persistent Systems, Mphasis, Coforge, and L&T Technology Services, which saw stronger gains (4-10%) post-Fed meeting, might continue their momentum due to:
    • Relative lower valuations compared to large-caps, attracting potentially higher returns.
    • Niche capabilities and expertise in specific segments, potentially benefiting from targeted IT spending.
    • Growth potential in cloud computing, automation, and other emerging technologies.

Indian Companies Potentially Impacted:

  • Accenture: While Accenture’s deal wins are strong, its weaker growth guidance could create short-term uncertainty, potentially impacting its share price compared to other Indian IT firms with more confident growth forecasts.
  • Domestic-Focused IT Companies: Companies with limited exposure to the US market might see relatively slower growth compared to those benefiting from a potential pick-up in US IT spending. This could include smaller IT firms or those focused on domestic Indian projects.

Global Companies Likely to Gain:

  • US Technology Giants: Companies like Microsoft, Amazon, and Google Cloud, already capturing a significant share of the IT spending growth, could benefit from increased corporate budgets for technology projects due to lower borrowing costs.
  • Global Consulting Firms: Companies like Accenture, Deloitte, and McKinsey & Company, providing broader tech-related consulting services, could see increased demand for their expertise as corporates navigate digital transformation and automation initiatives.

Global Companies Potentially Impacted:

  • IT Hardware Manufacturers: Companies like Dell, HP, and Lenovo, whose revenue relies heavily on hardware sales, might face slower growth if businesses prioritize software and cloud-based solutions due to tighter budgets.
  • Pure-Play Software Companies: Smaller niche software providers without diversified services or global reach might face increased competition from larger Indian and US tech giants offering comprehensive solutions.

Market Sentiment:

  • Positive Sentiment: The news regarding the Fed’s dovish stance and potential IT sector growth likely creates a positive sentiment in the market, attracting investors towards IT stocks.
  • Sector Rotation: Investors might shift their focus towards IT stocks from other sectors considered less promising in the current economic environment.
  • Volatility: While overall sentiment might be positive, uncertainties around specific company performance and global economic developments could lead to short-term fluctuations in stock prices.

Remember, this analysis is based on limited information and the actual impact on specific companies and sectors will depend on several factors, including future economic data, individual company performance, and changes in global geopolitical conditions. Conducting further research and considering individual company financials and industry trends is crucial before making investment decisions based on this news.

Citation: ET Bureau, “Revival in IT Stocks Likely to Continue in New Year”, Dec 22, 2023.

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