IT cos pray for succour in H2

Information technology (IT) stocks seem to be garnering renewed interest with the Nifty IT index rising 6% so far in November. The better-than-expected October US CPI inflation data has raised hopes that the US Federal Reserve’s rate hiking cycle is nearing its end. If this hope materialises then it should come as a boost especially to the banking, financial services, and insurance (BFSI) sector—a key revenue generator for Indian IT companies.

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The elevated interest scenario has been a drag on the earnings of the IT sector, keeping revenue visibility low. After two quarters of a decline, aggregate revenues of the top five IT firms returned to growth in the September quarter (Q2FY24), however, the sequential recovery in constant currency was tepid at 0.3%, said Jefferies India. While midcap IT companies continued to fare better than larger-caps on this parameter in Q2, the revenue growth differential has narrowed.

Further, the sector’s revenue growth outlook for the second half of FY24 is far from inspiring. “Our recent interactions with seven IT services companies highlighted that a pick-up in demand environment remains elusive," said Jefferies in a report dated 17 November. A transition from growth mindset to survival mindset among clients is leading to rising scrutiny of discretionary IT spends, it added.