IT shares rally on value buying; TCS, HCL Tech, Wipro gain over 10%

Shares of information technology (IT) companies rallied by up to 14 per cent on the National Stock Exchange (NSE) on Friday after Accenture reported a better-than-consensus Q2 performance. Meanwhile, the Rupee hit a new low on Thursday, falling below 75 against the US dollar for the first time.

Tata Consultancy Services (TCS), HCL Technologies, Wipro, MindTree, and NIIT Technologies gained in the range of 10 per cent to 14 per cent on the NSE as investors indulged in some value-buying as valuations turned attractive after the recent fall in stock prices. Infosys, Tech Mahindra, Tata Elxsi and Hexaware Technologies gained between 8 per cent and 9 per cent.

At 01:05 pm, Nifty IT index, the top gainer among sectoral indices, was up 10.6 per cent, as compared to nearly 5.2 per cent gain in Nifty 50 index.

In the past one month, the IT index has slipped 32.3 per cent factoring in potential demand shocks from COVID-19 spreading to key client markets (US/ Western Europe), an oil price shock and potential impact on global growth.

Despite the strong results, Accenture lowered its FY20 revenue guidance to 3-6 per cent YoY local currency growth (vs. 6-8 per cent YoY local currency growth earlier) with a more-than-normal range for the Q3FY20 (quarter ending May’20). The company had reported its Q2FY20 (fiscal year ending Aug’20) results on Thursday.

“Accenture’s revenue guidance cut confirms our fears around a possible hit to revenue growth for Indian techs in H1FY21 due to global growth scare and potential reset to client situations. We continue to believe that Indian IT’s FY21 growth prospects remain at risk, a significant contrast to the view that had gained currency post Dec’19 quarter results across the Street of normalization/improvement in revenue growth in CY20/FY21,” analysts at Emkay Global Financial Services said in IT sector update.

The brokerage firm, however, retained cautious view on Indian tech companies although significant price damage in CY20 YTD has made valuations attractive across some names.

“Indian IT firms have limited direct exposure to worst impacted geographies from the COVID-19 outbreak. The key headwinds for Indian IT firms is indirect impact from industries affected in China and the virus driving travel bans/restrictions into western client markets,” analysts at JP Morgan said.

The four scenarios for the impact from 1-1.5 per cent revenue impact in the mild case, 2-3 per cent in medium impact (most likely), through 4-6 per cent in a mild recession and 8-12 per cent in a GFC type scenario. This will be counterbalanced by 5-9 per cent earnings support from INR, it saoid.