Foreign Investors Show Confidence in IT Stocks
IT Stocks – Leading up to the Q3 results season, set to begin on Thursday, January 9 with Tata Consultancy Services (TCS) announcing its December quarter results, foreign institutional investors (FIIs) have significantly increased their investments in IT stocks, totaling over $1 billion.
According to NSDL data, out of the net investment of Rs 15,446 crore by FIIs in December, approximately two-thirds (Rs 9,050 crore) were allocated to IT stocks.
Positive Outlook for Indian IT Companies
While the upcoming Q3 numbers for IT services exporters are expected to be a mixed bag due to the seasonal weakness typically experienced in the December quarter because of holidays and furloughs, FIIs are optimistic that FY25 could mark the bottom of revenue growth for Indian IT companies.
Looking ahead to 2025, the macroeconomic environment is more favorable than it has been in the past two years. The Federal Reserve rate cut is already in progress, inflation seems to be under control, and the US election is now in the past, with the new administration viewed as business-friendly, according to BNP Paribas analyst Kumar Rakesh.
Highlighting that the Indian IT services sector is one of the few opportunities in India for domestic investors to benefit from the US monetary and fiscal easing cycle, Rakesh mentioned that factors such as dollar strength, inventory restocking, and retail consumer-friendly themes will support Indian IT.
Expectations for Q3 Performance
Nomura also anticipates an improvement in revenue growth in FY26, driven by the partial return of discretionary demand.
Although a robust recovery in discretionary demand may take some time, it is unlikely to deteriorate further. The initiation of the interest rate-cutting cycle and a potential increase in decision-making by US corporates following the November 2024 elections could boost demand. Additionally, the adoption of GenAI is expected to gain momentum in the next 12-18 months, potentially leading to increased demand for cloud services and data standardization, as noted by Nomura analyst Abhishek Bhandari.
Top Picks for Investment
HCL Technologies is expected to report the strongest growth in the third quarter. Nomura predicts a 3.5% quarter-on-quarter revenue growth in constant currency terms, thanks to strong software performance. On the other hand, Wipro is expected to have the weakest performance with a -1% QoQ growth.
In the mid-cap category, Nomura anticipates Persistent and Coforge to show the strongest revenue growth at +5% QoQ organically, while Mphasis is expected to have no revenue growth, marking the weakest performance.
Kotak Institutional Equities, however, believes that Coforge, Persistent, and HCL Technologies will lead the growth, while TCS, LTIMindtree, and Mphasis may disappoint.
Choosing the Right Stocks
In terms of stock recommendations, Nifty IT yielded a 22% return in 2024, outperforming Nifty’s 9% gain significantly. Brokerages are optimistic about better revenue growth in FY26 compared to FY25, driven by the recovery in discretionary spending and an improving macro environment post-Trump.
Motilal Oswal has identified LTIMindtree as its top pick among Tier-1 players, citing its strong vertical and service line exposures. Among mid-tier firms, Coforge is expected to lead with 5% QoQ revenue growth.
Nomura’s top picks in the IT sector include Infosys, Wipro, Coforge, and eClerx. BNP Paribas favors Infosys as the top sector pick, followed by TCS, HCL Technologies, and LTIMindtree.
“Persistent Systems stands out among mid-cap companies due to its robust revenue growth potential and attractive PEG ratio. Conversely, we have reservations about Wipro’s growth prospects and are exercising caution with regards to Tech Mahindra and Mphasis, as we perceive their risk-reward ratio to be evenly balanced. These insights were shared by BNP Paribas.”
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Disclaimer: This blog post is for informational purposes only and should not be considered financial advice. Investors should conduct thorough research and consult with a qualified financial advisor before making any investment decisions.