Worst to first! 4 reasons why IT stocks are selling like hot cakes on Dalal Street

The sharp turnaround in the fortunes of tech stocks comes despite incessant selling by FIIs. After selling IT stocks worth over Rs 3,500 crore in December, foreigners moved out another Rs 2,100 crore from the tech pack.

In the last one month, midcap IT stock Persistent has been the top gainer with a 25% return, followed by 10% upside in

. The two biggies – and – have rallied around 8% each during the period.

Here are 4 key reasons behind the comeback of IT stocks:

1) Nasdaq effect
Throughout history, Indian IT stocks have displayed a strong correlation with the performance of tech stocks on Wall Street. Nasdaq is up around 13% in the last one month on the back of a rally in tech megacaps like Meta which has bounced back 44% and Tesla’s 60% rally.

“Indian tech outperformance is largely because of Nasdaq doing very well. Indian tech companies always follow Nasdaq,” Amit Jeswani, Founder, Stallion Asset, told ETMarkets.The rally on Dalal Street tech stocks is not just limited to services but has also extended to consumer tech stocks. In the last 5 days, is up 28%, 8% and 11.5%.

2) Earnings upgrades
In the last one month, TCS has seen 6 target price upgrades, Infosys and Persistent 5 each.

also saw 4 upgrades, Trendlyne data shows.

The upgrades came after the Q3 numbers did not turn out to be as bad as feared. “Revenues of Tier-1 IT came in above expectations, with the exception of

. This beat was aided largely by an increase in pass-through revenues. Revenue growth has slowed down to low-teens across companies and should move down further in the subsequent quarters,” domestic brokerage Kotak Institutional Equities said.

Analysts believe that EBIT margins bottomed out in Q1 of FY23 and has been on an improving trajectory since then.

3) Bottom-fishing
Many long term investors have been busy cherry-picking high quality names among IT stocks after they were hammered on fears related to recession, margin compression and deal wins.

, , Wipro, LTTS and LTIMindtree are still down at least 30% from their 52-week high levels.

In the meantime, the earnings have gone up and analysts believe that the downside is limited now because most of the bad news is already priced in.

4) Recession fears easing
While many banks and asset managers like BlackRock, Wells Fargo and Neuberger Berman have reiterated recession calls in recent weeks, the fears seem to be reducing.

“A recession view for the developed markets, which was a consensus a few months ago, still holds but with reduced intensity,” Kotak’s Kawaljeet Saluja said.

Analysts say that IT stocks are at an interesting juncture now —moderate upside if it is just a slowdown in developed economies, moderate downside in case of a recession.

“A continued improvement in macro expectations for CY23 could lead to positive surprises on growth, which in turn could limit derating for IT stocks in the future,” said Jefferies analyst Akshat Agarwal.

Which IT stocks to buy?
Jefferies has maintained its cautious outlook on the sector but has a buy rating on Infosys.

Kotak said it likes stocks that offer good growth potential and can participate in both discretionary spends as well as cost take-out initiatives of clients and available at reasonable valuations. Infosys and HCL Tech fit the bill among Tier-1 IT while Mphasis is Kotak’s preferred pick among mid-tier names.

Macquarie has rated Persistent, LTIMindtree, Coforge, LTTS,

and with an ‘outperform’ rating.

(With data inputs from Ritesh Presswala)

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)