TCS, Wipro, and other IT stocks rebounded up to 6% on Wednesday, snapping an eight-day losing streak. The Nifty IT index rose nearly 3% as a stronger US dollar boosted sentiment. However, brokerages remain cautious ahead of the Q2 earnings season, as Jefferies expects large firms to show weak growth.
Synopsis
IT stocks rebounded on Wednesday, with TCS, Wipro and Coforge snapping an eight-session losing streak. The Nifty IT index rose nearly 3%, aided by a stronger US dollar and higher US bond yields, though brokerages remain cautious ahead of the Q2 earnings season.
IT investors finally found some relief as the shares of TCS, Wipro, Coforge and others rebounded up to 6% on Wednesday, snapping a massive eight-session-long losing streak, although brokerages remained cautious ahead of the upcoming Q2 earnings season.
Nifty IT jumped nearly 3% to cross 28,380 on Wednesday morning, after dropping more than 5% over the past eight sessions. IT stocks were among the top gainers on market today as the US dollar strengthened further, wrapping up its best month since June after the Federal Reserve’s renewed focus on taming inflation pushed interest-rate expectations and US bond yields higher.
Dollar strengthens
The Bloomberg Dollar Spot Index jumped 1.9% in September, touching the highest level in two months. Strong US economic data and heightened inflation risks have been lifting the currency. This comes as the raging conflict in the Middle East has kept energy prices high and pushed Treasury yields to historical peaks, with the 30-year reaching the highest level since 2002.
Indian IT companies derive a major portion of their revenue from the US. Hence, strengthening dollar implies they get paid more rupee for the same dollar revenue they earn in the US. Hence, a stronger dollar boosts sentiment for IT stocks.
Coforge shares rallied around 6%, while LTM, Mphasis, Persistent Systems and OFSS shares jumped around 4% each, as seen at around 10.20 am. Tech Mahindra, Wipro and TCS shares gained 3%, while Infosys shares were up around 1%.
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Why are brokerages cautious ahead of Q2 earnings season?
While the optimism is high after the massive selloff, analysts remain cautious ahead of the Q2 earnings season that is set to begin next week with TCS announcing its results on October 8. Jefferies expects the large IT firms to deliver their weakest Q2 growth in three years. Aggregate margins may improve by 30 bps sequentially, supported by currency tailwinds, it noted.
While mid-sized IT firms will see higher growth (3.5% QoQ in cc), growth among large IT firms may remain subdued at 0.5% QoQ cc, the global investment bank said. Among large IT firms, HCL Tech, TechM and Infosys will lead growth due to inorganic contributions, while Wipro will lag, it added.
Jefferies said investor focus will primarily be on growth outlook. “AI-led deflation has more legs to go and demand environment is not improving. Macro pressures driven by rising oil prices and interest rates are not helping either,” it said. In this context, the international brokerage expects Infosys to cut its FY27 revenue growth guidance by 100 bps to 0.5-2.0% YoY cc, while HCL Technologies is likely to narrow its FY27 services revenue growth guidance range by 50 bps to 2-4% YoY cc. For Wipro, Jefferies expects soft Q3 FY27 revenue growth guidance of -1.5% to +0.5% QoQ cc.
JM Financial recently said investors expect some improvement in growth, given that Q2 is seasonally a stronger quarter. However, macro uncertainty and AI-led productivity continue, while competitive intensity has also increased, with the industry now entering the fourth year of subdued growth, it warned. Overall, the domestic brokerage expects another soft quarter for most large tiers.
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