Indian IT stocks likely to attract strong fund flows amid positive earnings

IT stocks in India: The information technology (IT) stocks in India are poised to attract increased fund flows from both local and global investors in the next two quarters, analysts predict, buoyed by positive sentiment surrounding a soft landing of the US economy and better-than-expected earnings.

In the final two months of 2023, shares of India's IT companies, which significantly contribute to their revenue from the US, experienced a notable surge of 16.13 per cent, surpassing the benchmark Nifty 50's gain of 13.9 per cent.

The impressive revenue growth reported by leading IT firms like Tata Consultancy Services and Infosys has been a key driver behind the outperformance of IT stocks in January. The Nifty IT index recorded a gain of about 4 per cent this month, in contrast to the 0.3 per cent drop in the Nifty 50 index.

Sanjay Bembalkar, co-head of equities at Union Mutual Fund, notes, "We believe the IT sector is going through a classical sector rotation trade in favour of it. We expect investors, both foreign and domestic, to increase allocations further on clarity over the change in the monetary policy stance in the US"

Although approximately one-third of analysts covering IT companies in the Nifty 50 index currently hold an equivalent of "sell" or "strong sell" recommendations on the stocks, analysts anticipate a shift as foreign portfolio investors (FPI) are likely to return to the sector.

Foreign portfolio investors made modest purchases of Rs 908 crore in fiscal 2024, a fraction of their total investment of Rs 1.97 lakh crore. With IT having the second-highest sectoral weightage of 13.62 per cent in the Nifty 50 index, it secured only 0.46 per cent of the total FPI purchases in the fiscal year so far.

"FPI holding of India's IT services sector is materially below the last 10-year average," notes Kumar Rakesh, associate director of equity research at BNP Paribas. He anticipates increased FPI buying in 2024, marking a cyclical recovery for the sector.

Market leaders TCS and Infosys reported third-quarter revenue growth that exceeded expectations, accompanied by optimistic forecasts. Santosh Pandey, head of Nuvama Professional Clients Group, states, "This time commentary is backed by sustained strong deal booking and the expectation that after three to four quarters of project re-prioritization, we have crossed the point of maximum pain." Pandey expects heightened buying interest in IT stocks over the next three to four months, leading up to their March-quarter earnings when these companies provide annual growth guidance.

(With Reuters inputs.)