Nifty IT index corrects over 11% in 3 months! Analysts remain bullish on IT stocks; expect TCS to lead the pack

Information Technology (IT) stocks have been declining for the past one week in view of the volatility due to the earnings season.

In the past one week, as on April 12, the index declined more than 5%, and nearly 11% in the last three months. Source: Pixbay

Information Technology (IT) stocks have been declining for the past one week in view of the volatility fanned by the earnings season. Nifty IT was one of the top laggards even on Tuesday with over 1% dip.

In the past one week, as on April 12, the index declined more than 5%, and nearly 11% in the last three months, reflecting bearish trend in information and technology stocks in the short term. However, the Index clocked nearly 30% return in the past one year, as per technical data of the index.

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During the same period, IT behemoth Tata Consultancy Services (TCS), which declared its result on Monday, grew by over 14%.

What's triggering profit booking in IT stocks

Speaking of correction in IT stocks, V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services, said that it was primarily due to action in the US market.

"The tech-heavy NASDAQ has turned distinctly weak and this has led to some profit booking in Indian IT stocks too. However, IT sector is likely to do well as TCS results indicate robust deal wins and order flows," said Vijayakumar.

Analysts take on TCS Q4 FY22 results

On Monday, TCS posted better than expected results in Q4FY22, as the country's largest software services firm crossed the Rs 50,000 crore revenue mark for the first time, as per BSE filing of the company.

In a regulatory filing on Monday, the company said its revenue jumped 15.8 per cent to Rs 50,591 crore in the reporting quarter on an annualised basis.

TCS also closed fiscal 2022 with $25 billion annual revenue of Rs 1,91,754 crore, up 16.8 per cent, driven by the highest-ever incremental revenue of USD 3.533 billion and an all-time high order book. Its annual profit jumped 14.8 per cent to Rs 38,327 crore.

On TCS Q4FY22 results, Geojit Financial Services Chief Investment Strategist was of the view that the results were in line and marginally above expectations. "This can support IT stocks even if there is some profit booking," he said.

The expert was also hopeful that the results of leading financial companies will be better. "This along with good expected performance from telecom, oil and gas, metals, pharma and chemicals will lead to buying on dips imparting resilience to markets," added the expert.

Vijay Dhanotiya, Lead of Technical Research, Capitalvia Global Research Ltd, also said that TCS earnings were in line with expectations.

"It has got the highest ever quarterly deals in this quarter. Total contract value (TCV) for the quarter came in at $11.3 billion, The company continues to build a strong relationship with its clients and it seems likely that it will continue its growth journey in the future as well as the companies all around the globe move towards making strong digital ecosystem," Dhanotiya, added.

Key takeaways from TCS results and outlook for IT stocks

The key takeaways from the TCS results are that the demand environment is quite strong driven by cloud, cyber security, and digitization, says Arun Malhotra, Founding Partner & Portfolio Manager, CapGrow Capital Advisors

There might be small hiccups in margins due to strong wages as well as some disruptions due to slower growth in Europe, however, the revenue metrics for TCS were quite robust and we expect the same for other major large-cap IT companies, he said.

"The fundamental construct of demand is digital transformation, spending on IoT, newer technologies, and higher spends on innovation than on maintenance. The majority of the clients are focusing on tech budgets in view of cost pressures faced in their respective businesses and it may be the last segment to get hit and any impact could be seen with a time lag of 6 months. Overall, we still see the demand environment and deal wins to be strong drivers of future stock returns for IT companies," he added

Meanwhile, on Tuesday, TCS gained nearly one per cent to Rs 3738.60 per share on the back of strong results and spurt in volume on the BSE, before profit taking hit the scrip. At 1.30 pm, shares of the IT giant were trading marginally lower by 0.11% to Rs 3692.45 apiece.

(Disclaimer: The views/suggestions/advice expressed here in this article are solely by investment experts. Zee Business suggests its readers to consult with their investment advisers before making any financial decision.)

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