The IT industry witnessed a significant boom during the pandemic as the demand for digitalisation increased. As a result of the elevated demand, the industry had seen a significant rally in stock prices.
In IT, industry growth and a high attrition rate are two sides of the same coin. The demand prompted aggressive hiring, talent retention and salary hikes, which caused severe margin shocks in the preceding quarters.
Post two years of massive profits and salary increases, the stock prices plummeted. Nifty IT index fell nearly 30% from its peak in 2022 and corrected the high valuations that it was trading at.
From where we stand now, the IT sector is seeing a trend reversal. The conditions are improving given the slowdown of hiring and attrition rate normalising. This will improve their margins in the coming quarters. It will be fuelled by the sector’s strong sales, as well as healthy deal wins.
Another factor that favours export-oriented IT services is the strengthening of the dollar against the rupee. America is the biggest consumer of Indian IT companies. They contribute over 60% of the revenue. Therefore, the revenue in dollars generates a higher value when converted to Indian rupee enhancing the top line of the companies.
On technical grounds, the Nifty IT index is forming lower lows while the relative strength index is forming higher lows. This is known as a bullish divergence. This suggests that the bearish momentum is slowing down in the index. It is usually a precursor to a bullish reversal.
Further, the ratio chart of Nifty IT to Nifty 50 index has dropped to 1.50 levels. This level acted as a resistance for several years before the pandemic. The same level will act as a support now. This means that the Nifty IT index will outperform the Nifty 50 from here.
Overall, the next few quarterly results could see margin surprises as cost-cutting measures and order-book execution begin to take effect. The sector is well poised for growth in the long run, and it seems now is the right time to invest in IT companies.
Technical outlook
Nifty ended the week with cuts of more than a per cent. It has ended the week with a hammer candle, which suggests that the short-term correction could probably be over. The daily RSI is also bouncing back from 40 levels, which suggest the upward momentum could resume soon. Call writing near 17,000 strikes in monthly expiry indicates that this level is likely to act as major support. From a seasonality perspective, October is a bullish month for the markets. Eight out of the last 10 times, markets have ended on a positive note in October. Thus, all of these suggest that traders must look for buying opportunities.
Expectations for the week
Markets may be dominated by global news flows in the coming week, as no major events are expected. Investor sentiment may be influenced by the US unemployment and domestic data, such as manufacturing, deposits, and loan growth numbers next week. Other essential factors that may affect the market include the fluctuation of crude prices and the strengthening of the dollar against other currencies. Investors should pay attention to stock-specific news. Nifty50 closed the week at 17,094.35, down 1.34%.
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