Nifty IT Index rises 1% amid relief rally: Should you buy or sell IT stocks?

Mint

7 hours ago

Stock Market today: The Nifty IT Index gained more than 1% during the morning trades on Tuesday amid a relief rally: Is it time to buy or sell IT stocks ahead of Independence Day?
The Nifty IT Index opened at 34,589.85 levels, higher than the previous day's closing price of 34,544.65. The Nifty IT Index continued to gain further to an intraday high of 35,072.50, which meant gains of more than 1% during the intraday trades. Tech Mahindra, Persistent Systems, Coforge, and HCL Technologies were among the key gainers that led to the rise.
Analysts still say that the concerns around Trump's tariffs still remain, and there remains ambiguity on the issue of whether the recently announced US tariffs on Indian exports cover the services sector or not. This predominantly includes IT services, and these could have second-order effects, impacting demand for both existing contracts and new deal wins.
The Indian IT sector's strong reliance on the US market is known, and any negative impact on US economic growth, high interest rates due to inflation, or broader macroeconomic constraints from higher tariffs may lead to higher operating costs, lower profits from operations, and, eventually, a reduction in technology spending and lower commitments from large US-based clients.
This would, in turn, have an impact on the growth prospects and income of Indian IT services firms.
Tariffs are expected to affect all sectors in the US. With the BFSI segment being one of the largest client verticals for Indian IT, it is likely to see indirect pressures, said Ajit Banerjee, president and chief investment officer at Shriram Life Insurance.
Revenue performance was weak in the quarter, with four of the five large IT companies reporting revenue decline sequentially and three of the five on a year-on-year basis. The BFSI vertical held up well and grew 2.7% sequentially and 5.7% year-on-year in dollar terms, while the manufacturing, retail, and healthcare verticals underperformed, said Kotak Institutional Equities . Companies cited various factors for weak demand, including tariff impact and weak discretionary spending across many verticals.
The Q1FY26 results reflected the impact of a ramp-down in existing deals and a slower ramp-up of newly won contracts, partly due to trade tariff uncertainty., said Banerjee. While the deal pipeline remains healthy, it is skewed toward cost take-out and large vendor consolidation opportunities, with discretionary spending still subdued. EBIT margins in FY26 estimates are now projected to decline or remain flat. Employee addition is expected to lag revenue growth due to productivity gains from AI adoption. said Banerjee.
At present, the sector trades at a 1-year forward price-to-earnings ratio of 23.8 times versus its 10-year average of 22.7 times. Therefore, the present valuations are still higher than 10-year long-term averages, as per Banerjee. It may be prudent to wait for valuations to approach the 10-year average or -1 standard deviation, added Banerjee.
Since December 2024, the IT index has struggled to deliver any meaningful performance. The sharp pullback in the index was quickly followed by a steep sell-off, indicating an ongoing battle between buyers and sellers—buyers are aggressively accumulating on dips, while sellers are equally aggressive in selling on rallies, said Kunal Kamble, Sr. Technical Research Analyst at Bonanza.
A decisive breakout in either direction will set the tone for the next phase of movement. On the daily time frame, the index is retesting its 'window' area, which typically acts as a strong support or resistance zone. In this case, it is acting as strong support. However, if the index slips below this zone, it could erode buyer confidence and trigger further selling, potentially dragging it down to 33,380–32,689. On the upside, sustained trade above 35,560 could attract buyers and drive the index higher towards 36,010–36,520, as per Kamble.
Disclaimer: The views and recommendations above are those of individual analysts or brokerage companies, not Mint. We advise investors to check with certified experts before making any investment decisions.