Rs 2.3 lakh crore comeback: IT stocks roar to life, but are they running on low battery?

Time of India

28-04-2025

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In a market where tech stocks have long been buried under bearish sentiment, Indian IT stocks have staged a dramatic comeback, adding a staggering Rs 2.32 lakh crore in market value over just nine trading sessions. The Nifty IT index has surged over 9% since April 9, far outpacing the broader market and hinting at a possible turnaround for the sector. But is this rally built on solid ground or just a fleeting spark in a volatile market?This sudden surge comes even as most IT stocks remain trapped in a bear grip amid an uncertain demand environment. Yet, signs of de-escalation in global trade tensions and a recovery in US markets have helped propel the sector higher, with investors flocking to IT as a defensive play amid escalating geopolitical tensions between India and Pakistan after the attack in Kashmir's Pahalgam.While stock prices have been on fire, analysts remain cautious about calling it a full-fledged recovery. Sushovon Nayak, IT Research Analyst at Anand Rathi Institutional Equities, emphasized that despite the strong performance, "this rebound appears largely technical and sentiment-driven rather than fundamentally supported." He added that recent quarterly results from leading IT firms were mixed, with many issuing cautious guidance.Saji John, Senior Research Analyst at Geojit Investments, echoed a similar sentiment, stating the March quarter results reaffirmed a cautious outlook, with most largecap IT firms reporting mixed performance.'Near-term performance may remain subdued due to US tariff uncertainties and geopolitical stress, affecting discretionary spending in key markets. Inflationary pressures have led to decision-making delays in retail, manufacturing, and insurance verticals, though the deal pipeline remains strong,' John told ETMarkets.However, he said IT remains a contra bet opportunity after the recent correction as renewed hopes of easing trade tensions between the US and China have boosted investor sentiment, reflecting broader global trends.Despite the near-term headwinds, both analysts pointed to attractive valuations and long-term structural opportunities in the sector. John observed that "large-cap IT stocks have undergone significant corrections over the past year and are now trading near to their long-term average, making the stocks attractive for long-term investors." He added that healthy order inflows in Q4 and sustained momentum into FY26 "provide optimism for recovery," driven by continued demand for cost optimization, vendor consolidation, and AI and cloud adoption.The recent rally has seen mid-cap names like Mphasis and Persistent rally up to 20%, while tier-I players such as Tech Mahindra and HCL Technologies have notched double-digit gains. This is despite IT companies delivering disappointing Q4FY25 results, weighed down by inflationary pressures and decision-making delays in key verticals like retail, manufacturing, and insurance."While selective stock-specific opportunities may emerge during this correction, we remain structurally positive on the sector overall," said Nayak. He pointed to Anand Rathi's recent sector note from April 15, which highlighted that although results for Q4FY25 and Q1FY26 are expected to remain muted, "discretionary demand and structural opportunities in AI — particularly in data and legacy infrastructure modernization — will support IT spending from the second half of FY26, with potentially stronger tailwinds in FY27."Valuations have become a focal point for investors seeking value in large-cap names. "While Q4 numbers have been weak for the large-cap IT names, we draw comfort from the valuations, which are closer to their 10-year averages, in addition to their FCF and dividend yields between 4-5% and 2-3% respectively," Nayak said. He noted that while TCS and Infosys continue to be resilient from a valuation standpoint, growth concerns persist. Wipro has guided for -2.5% growth at the midpoint for Q1, while Tech Mahindra is rebuilding its BFSI segment and making a renewed push into telecom.Meanwhile, LTIMindtree stands out as a potential outlier among large-caps. "Under the new CEO, Mr. Venu Lambu, LTIM is poised for higher growth in FY26, with the company being the only outlier in large-cap IT to mention that Q1FY26 will be better, with retail and manufacturing segments continuing to remain stable," Nayak added.John cautioned that while inflationary pressures have delayed decision-making in several verticals, "the deal pipeline remains strong," offering hope for sustained growth into FY26. He added that a stable inflation trajectory could give the US Federal Reserve room to ease interest rates, potentially spurring more client engagements.For now, the Rs 2.32 lakh crore rally has breathed life into a battered sector, but analysts agree that fundamentals will need to catch up with sentiment for the momentum to sustain. As global markets stabilize and demand visibility improves, investors will be watching closely to see if this rebound is a precursor to a lasting recovery or just a short-lived respite in an otherwise challenging environment.(Data: Ritesh Presswala): Recommendations, suggestions, views, and opinions given by experts are their own. These do not represent the views of The Economic Times)