IT stocks are 'defying' the market slump—are they finally ready to lead or just a trap?

IT stocks rose on Thursday as investors turned their attention to TCS, which is set to kick off the Q2 earnings season. Analysts expect modest sequential revenue growth, while a favourable base and margin support could aid year-on-year growth. Currency tailwinds may also support margins across Indian IT services companies.

IT stocks rose up to 3% on Thursday, leading gains despite weak market sentiment, as investors turned their attention to TCS, which is set to kick off the Q2 earnings season later today.

Shares of Tata Consultancy Services (TCS) jumped around 3%, while heavyweight peers HCLTech and Infosys gained nearly 2% each. Mphasis, Coforge, LTIMindtree, Tech Mahindra, Persistent Systems and Wipro shares gained 1-2%.

The gains pushed the Nifty IT index nearly 2% higher, making it the top-performing sectoral index on Thursday, while most other sectoral indices remained in the red.

The rise in IT stocks came as the dollar eased slightly but remained close to multi-month highs. Indian IT companies derive a major portion of their revenue from the US, so a stronger dollar means they earn more in rupee terms for the same dollar-denominated revenue. This typically supports sentiment towards IT stocks.

Ongoing concerns around the impact of artificial intelligence have also supported sentiment, with Indian IT services companies increasingly seen as a so-called 'anti-AI' trade.

All eyes on TCS Q2 resultsTCS is expected to kick off the September-quarter earnings season on a cautious note today, with analysts expecting the IT bellwether to post modest sequential revenue growth. Year-on-year growth is likely to look better, aided by a favourable base and margin support.

TCS will likely report a revenue growth of about 13% year-on-year, while profit is expected to rise around 9%, according to the average of seven brokerages. On a sequential basis, however, growth is expected to remain soft, with most brokerages pencilling in constant-currency revenue increase of 0.5-0.6%.

The modest sequential growth reflects the broader weakness in Indian IT services. Client spending remains cautious, discretionary projects are still slow, and investors are watching whether artificial intelligence will add new revenue streams or reduce billing in traditional services.

Overall, Jefferies projects Indian IT services cos to report weak sequential revenue growth of 1.7% in constant currency terms, while aggregate EBITDA margins are expected to improve by 30 bps QoQ, supported by currency tailwinds.