Nifty IT index surges nearly 3%; Coforge, Persistent zoom 12% on strong Q2

Analysts anticipate growth momentum to return in FY25 for IT sector, aided by a lower base coupled with easing sectoral headwinds.

Nifty IT index in focus: Shares of information technology (IT) companies, mainly MidCap- Persistent Systems and Coforge - are in focus, as they rallied up to 12 per cent on the National Stock Exchange (NSE) in Wednesday’s intra-day trade after reporting a strong earnings for the July-September quarter (Q2) of financial 2024-25 (FY25).

Nifty IT index, the top gainer among sectoral indices, has rallied 2.8 per cent in intra-day trade. At 11:28 AM, Nifty IT index was up 2.5 per cent, as compared to 0.41 per cent rise in the Nifty50.

Mphasis and L&T Technology Services (LTTS) have gained 5 per cent and 3.5 per cent, respectively. Meanwhile, LTIMindtree, HCL Technologies, Tech Mahindra, Tata Consultancy Services (TCS), Infosys and Wipro are up in the range of 1 per cent to 2 per cent.

 

Sharekhan anticipates growth momentum to return in FY25 for the IT sector, aided by a lower base coupled with easing sectoral headwinds. Although the IT sector has already outperformed Nifty last year, the brokerage firm expects overall outperformance in calendar year 2024 (CY24) as well, driven by receding headwinds and better earnings visibility. Meanwhile, thus far in the CY24, Nifty IT index has gained 13 per cent, in line with the Nifty 50.

Among the individual stocks, Persistent Systems hit a record high of Rs 5,798.70, surpassing its previous high of Rs 5,692.95 on October 15, 2024. The company’s consolidated net profit grew 23.44 per cent to Rs 324.90 crore in the September quarter (Q2FY25). The company's profit stood at Rs 263.2 crore in the year-ago period (Q2FY24).

On the AI front, the company developed a robust strategy focused on two key areas: AI for technology and AI for business. It plans to integrate AI across all verticals. Besides, it has launched platforms like SASVA and iAura, with rapid adoption seen in its GenAI Hub across industries. They expect the weakness in the TMT vertical to bottom out, forecasting strong growth ahead.

"Right-shoring, pricing and growth momentum will continue to help in maintaining and improving the margins as management is confident of margin expansion of 200-300 bps over the next 2-3 years, albeit high utilisation and sub con optimisation benefits are likely to be limited, in our view: ICICI Securities said.

Persistent’s revenue growth was aided by broad-based growth across verticals while margin performance, despite wage hike, was helped by utilisation improvement and rationalisation of some costs. Deal wins have improved and may help keep revenue growth momentum strong going forward. Q3 may see a furlough impact but it is likely to normal furloughs especially in BFSI and HiTech verticals, analysts at Elara Capital said. The brokerage firm recommended an ‘Accumulate’ rating on the stock with a target price of Rs 5,880, based on 40x FY27E earnings per share (EPS) of Rs 147.

Coforge share also hit a record high of Rs 7,648.70, surpassing its previous high of Rs 7,580 hit on October 15, 2024. The IT firm reported a nearly 17 per cent increase in net profit at Rs 212 crore for Q2FY25, compared to Rs 181 crore in Q2FY24.

Revenue from operations surged over 34 per cent year-on-year, climbing to Rs 3,062 crore in Q2FY25 from Rs 2,276 crore in a year ago quarter. The company achieved a total order intake of $516 million during the quarter, including three large deals, marking the eleventh consecutive quarter with order intake exceeding $300 million.

The reported revenues were boosted by the Cigniti acquisition. The core performance seems to be muted Q-o-Q, especially on the margins front. While the Cignit acquisition boosted performance, analysts at ICICI Securities believe that Cigniti’s core services (testing) are susceptible to AI-led risk, and thus visibility is hazy. 

The brokerage firm said it awaits management commentary for further comments on the sustainability of Cigniti revenues. The company’s organic fresh order intake during the quarter remains strong, and increase in fresh order would provide for sustained growth momentum further.