IT index slips 4% in 2 days on profit bookings after surging 10%

Information technology (IT) stocks fell for the second day in a row, with the Nifty IT index falling 4% in the past two trading sessions due to profit booking. The IT index hit a record high of 39,286 during Tuesday’s intraday trading and climbed as much as 10% in the previous 11 trading days.

At 11.46 a.m.; The Nifty IT index, the biggest loser among sector indices, fell 1.9%, compared to 1.3% for the Nifty50 index. Tata Consultancy Services (TCS), Infosys, HCL Technologies, Mphasis, Tech Mahindra, Mindtree and Larsen & Toubro Infotech in the index fell 2% each.

IT companies will start reporting their third-quarter earnings next week. The October-December (Q3) quarter is expected to be another strong quarter for IT companies following the strong performance seen in Q2FY22. The growth momentum should continue, with mid caps outperforming Tier I companies.

The ICICI Securities analyst expects companies to see healthy revenue growth this quarter, thanks to lower furloughs and a surge in deals won in previous quarters. There would be cross-currency headwinds, which will dampen dollar earnings to some extent in the quarter.

Enterprises are also seeing favorable demand in terms of investment in new technologies such as cloud transformation, AI/ML, blockchain, which are further propelling demand in the coming quarters.

In terms of margins, we expect them to remain flat (with the exception of Coforge which is expected to show strong QoQ margin expansion) as supply-side pressure would limit margin expansion in proportion to revenue growth, the brokerage said in the third-quarter earnings preview.

Despite the seasonal weakness, Jefferies analysts expect IT companies to see constant currency (CC) growth of 3-3.9% quarter-on-quarter, driven by the surge in transactions. The overseas brokerage expects overall margins to decline 20 basis points quarter-on-quarter, due to supply-side pressures.

“We expect the healthy revenue growth momentum to continue into the seasonal third quarter due to a broad secular demand environment, with USD revenue growth of 1.9-3.3% vs. quarter (2.7-4.0% CC) for Tier 1 IT services companies. Tier 2 IT services companies are expected to grow between 1.1-10.5% CC QoQ,” said the Emkay Global Financial Services analyst.

The Nifty IT Index has returned around 10.5% over the past three months and outperformed the broader markets by 12%. We believe sustained revenue growth momentum with stable margins will support higher valuations, the brokerage said.

TCS, Infosys and Wipro are scheduled to announce their third quarter results on January 12, 2022. HCL Technologies’ board of directors is scheduled to meet on January 14, 2022.

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