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Mphasis, Infosys fall up to 6%, Nifty IT 3% ahead of Fed rate cut decision

The fall in IT stocks may also be attributed to a report which says Accenture Plc is planning to push back the bulk of its staff promotions by six months

Information technology major Tata Consultancy Services (TCS) on Friday termed the tax demand notices received by several of its employees a “discrepancy,” and the tax department will be reprocessing the returns.
Deepak Korgaonkar Mumbai
4 min read Last Updated : Sep 18 2024 | 2:29 PM IST
Shares of information technology (IT) companies slipped up to 6 per cent on the National Stock Exchange (NSE) in Wednesday's intra-day trade as investors booked profit in the stocks ahead of a crucial Federal Reserve interest-rate decision.

Mphasis, Persistent Systems, Tech Mahindra, L&T Technology Services (LTTS), Infosys, Wipro, LTIMindtree, Tata Consultancy Services (TCS), Coforge, and HCL Technologies slipped in the range of 3 per cent to 6 per cent in the intraday trade.

At 10:32 AM, the Nifty IT index, the top loser among sectoral indices, was down 3 per cent as compared to an unchanged Nifty 50 at 25,418.85. In the past three months, the Nifty IT index has outperformed the market, surging 25 per cent during the period. It had hit a record high of 43,415 on Tuesday.

That apart, the fall in IT stocks may also be attributed to a report which says Accenture Plc is planning to push back the bulk of its staff promotions by six months. The Dublin-based technology giant, according to a Bloomberg report, has told employees in an internal blog post last week that it will announce most promotions in June, rather than in the usual month of December.

Accenture, on its part, said: "We are permanently changing our primary promotion date from December to June, which is when we have better visibility of our clients' planning and demand."

IT stocks and US Fed rate cut

Fed rate cut is almost a certainty now. Its impact on the IT Services sector, analysts at JM Financial Institutional Securities believe, could be three pronged: a) lower cost of equity driving up stock multiples; b) discretionary demand revival as economy recovers; and c) lower interest burden on corporate opening up room for higher opex (hence IT Services).

Ceteris paribus (no change in demand), the brokerage firm said that they believe rate-cut led lower interest burden should benefit CME (Communication, Media and Entertainment) and manufacturing verticals more.

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Tech Mahindra, given 53 per cent exposure to these two sectors, is better placed. Revival of US banks' spend, however, is a bigger impetus which benefits Infosys/TCS/Wipro more, analysts said.

April-June quarter (Q1FY25) was the first quarter where incremental services growth was positive after 5 quarters, signalling a likely end of excess-IT unwinding phase. That means new project starts etc. have started to reflect in top-line growth as project cancellations/ ramp-downs are slowing down. This trend, the brokerage firm believe, is likely to sustain irrespective of rate decision.

Analysts believe recent uptick in sector multiples already reflect expectations of Fed rate-cut.

"This, we believe, shows up in the yield differential of NIFTY-IT and US 10-Y Bonds. Nifty-IT earnings yield slipped below US10Y bond yield towards Dec-2023 when Fed commentary turned dovish. Nifty-IT’s earnings yield has since stayed below US 10Y Bond yield likely in anticipation that bond yields will come down. We therefore believe the impact of the fed-rate cut on IT Services PER multiples is largely in the price," the brokerage firm said.

IT sector outlook


Meanwhile, as per Nasscom, the Indian IT market is expected to double to around $500 billion in FY30, clocking a compound annual growth rate (CAGR) of ~12.0 per cent over FY24-FY30e. Historically, the Indian IT market has clocked ~7.4 per cent CAGR vs global IT spends at ~5.0 per cent over CY16-CY24E (Gartner). 

With the anticipated surge in demand, Indian IT exports should continue to grow faster than that of global IT firms aided by incremental investments in generative AI (GenAI), supported by the ample availability of local talent pool (STEM: ~3mn) at a much lower rate (avg. $29/hr), Prabhudas Lilladher said in an IT sector report.

The brokerage firm remains positive on the broader theme of IT services outsourcing spends by global enterprises for modernising or transforming their operations. Although enterprises have pushed savings-led transformation deals of late, vs limiting their spends to cost-focused earlier, the improvement in macro environment is likely to boost sentiment and help resume long-deferred discretionary programs by late FY25 or early FY26. Having said that, the brokerage firm maintains caution on the near-term US election outcome, which might delay deal closure activities or execution of projects that have a higher onsite mix.

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Topics :Buzzing stocksstock market tradingMarket trendsIT stocksMarketsUS Fed ratesUS Federal Reserve

First Published: Sep 18 2024 | 11:18 AM IST

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