Rally in tech stocks in India faces earnings test as growth worries linger

By Chiranjivi Chakraborty

The rally in technology stocks in India may face a speed bump next week as companies report their December-quarter earnings in the face of rising skepticism among analysts.

The NSE Nifty IT Index of 10 software majors has surged about 17 per cent since late October, beating the NSE Nifty 50 Index. While the rally was initially driven by a global rebound in tech stocks, the Federal Reserve’s dovish pivot at the December policy meeting turbocharged the run.

Brokerage firms including Citigroup Inc. and Jefferies Financial Group Inc. are now sounding caution on the sector’s outperformance, citing rich valuations and tepid growth prospects. 

The Nifty IT gauge trades at 26.4 times its one-year forward earnings, a 31 per cent premium to the benchmark Nifty and sharply above the five-year mean, data compiled by Bloomberg show. 

“We remain cautious given risks to growth on back of macro headwinds and pace of margin improvement versus expectations,” Citigroup analysts Surendra Goyal and Rajiv Berlia wrote in a note Tuesday. “Valuations are at risk.”

Analysts expect flat-to-low single-digit growth in revenue for the top software firms in the three-month period ended December due to the reduced discretionary spending by clients and higher-than-expected furloughs in the quarter.    

The shift in focus among clients toward paring costs from making fresh investments “do not inspire confidence,” Kotak Securities said in a Dec. 29 note. Citigroup initiated negative catalyst watch on as many as four software exporters, including Wipro, citing possible earnings risk, while ICICI Securities downgraded five stocks in its coverage ahead of the earnings season that kicks off on January 11.

The rally’s sustenance now hinges on the outlook Indian software exporters provide on demand for their services and if the boom in generative artificial intelligence proves to be a catalyst for growth in 2024, analysts said.