Lok Sabha elections outcome: This sector has gained every time since 2004

Unlike other general election years, analysts expect the Nifty IT index to underperform the markets in the near-term amid muted demand environment and client caution around discretionary spends

Election fever is running high in India with the voting for 2024 Lok Sabha polls starting earlier in April.

A pre-election rally, meanwhile, took the benchmark S&P BSE Sensex, and the Nifty50 indices to fresh record highs above 75,000-mark and 22,750 level, respectively, on April 9.

As markets factor-in the ruling Bharatiya Janata Party (BJP) returning to power post the general elections on June 4, it may be prudent to plan a post-election portfolio.

Stock market performance post Lok Sabha election outcome

According to the data compiled by BS Research Bureau, stock markets' performance post the general election outcome has been mixed over the past four years.

While the markets fell during the three months following the poll outcome in 2004 and 2019, they climbed in 2009 and 2014.

Sectoral indices, too, have been a mixed bag. A common thread, however, that runs through the last four general election outcomes in 2004, 2009, 2014 and 2019 as regards market performance has been the Nifty Information Technology (IT) index.

The Nifty IT index, data shows, has outperformed the markets in each of the last four election years post the result announcement.

For instance, in 2004, the Nifty IT index advanced 6.4 per cent during the period under study, when the S&P BSE Sensex and Nifty50 indices fell 5.5 per cent and 7 per cent, respectively.

In the following election year, in 2009, the Nifty IT index soared 43 per cent as against around 20-21 per cent gain in the benchmarks. The trend was seen in 2014 and 2019 as well.

So, will the Nifty IT index outperform the markets in 2024 too? Or will the bleak sector outlook halt the winning streak?

Nifty IT: A dark horse?

Unlike other election years, analysts expect the Nifty IT index to underperform the markets in the near-term amid muted demand environment and client caution around discretionary spends.

"Infosys and Wipro gave weaker-than-expected revenue guidance post Q4FY24 results, reflecting continuity of weakness and challenges in the near-to-medium term. The managements of most IT majors, too, were wary of calling out margin improvement confidently for FY25. Thus, we believe the near-term outlook for the Indian IT services companies, especially tier-1, is muted," said Sanjeev Hota, head of research at Sharekhan by BNP Paribas.

In the March quarter of FY24, TCS reported a net profit of Rs 12,434 crore, up 9.1 per cent year-on-year (Y-o-Y) and 6 per cent quarter-on-quarter, on the back of one of its highest deal wins ($13.2 billion).

Infosys, meanwhile, reported a 30 per cent Y-o-Y increase in its Q4 net profit at Rs 7,969 crore, and 1.3 per cent Y-o-Y growth in revenue at approximately Rs 37,923 crore. The company guided its revenue growth of 1-3 per cent vs 1.5-2 per cent guidance given in January.

Wipro management, too, kept its revenue guidance unchanged for Q1FY25 to -1.5 per cent to 0.5 per cent.

Rupee to the rescue?

A falling rupee against the US dollar, typically, benefits IT companies' revenues during inflationary periods. Furthermore, a relatively stable rupee mitigates currency fluctuation risks, offering a buffer during an uncertain macro environment.

This time around, however, analysts expect the rupee to stay range-bound at 82.75-83.75/$ in the near-term. Thus far in calendar year 2024, the rupee has stayed flat versus the US dollar.

It, however, had depreciated by 2-3 per cent after the Lok Sabha result announcements, in 2004, 2014, and 2019, providing tailwinds to the sector.

Investment Strategy

That said, analysts said stock prices of most of the IT companies have already baked into the current challenges, thereby limiting major downside from current levels. The Nifty IT index has slipped over 5 per cent thus far in CY24 as against a 3 per cent rally in the benchmark Nifty50 index.

They, thus, suggest investors focus on companies with strong balance sheets, particularly those involved in AI and Gen AI technologies, and those companies de-risking by diversifying across different sectors.

"It is advisable to focus on high-quality stocks in the near-term, while long-term investors may accumulate such stocks at lower levels," said Vinod TP, research analyst at Geojit Financial Services.

Sanjeev Hota of Sharekhan, meanwhile, prefers TCS, followed by Infosys and Persistent Systems for medium to long term.