Nifty IT Index Hits New All-Time High: What's Driving Rally In IT Stocks?

The Q1 earnings seasons have begun with the release of financial results by some of the major giants engaged in the business of information technology (IT).

Stocks of these companies have rallied in the last few days causing the Nifty IT index to gain in nine out of the last ten trading sessions, as on Thursday. The index touched a new all-time high of 17,491.15 for the day.

On Thursday, shares of Infosys gained 15 percent to hit a new all-time high of Rs 955.60. Wipro was trading between gains and losses after a spike of 16 percent on the previous day. Gains were also seen in the share prices of Tata Consultancy Services (TCS), HCL Technologies, Mindtree, Tata Elxsi, Tech Mahindra and Hexaware Technologies, components of the Nifty IT index.

Management confidence

Experts believe that the rally is a result of the confidence shown by the management of these companies on their revenue for the rest of the financial year.

On Wednesday, after Infosys reported a 12.4 percent rise in consolidated net profit for the June-ended quarter to Rs 4,272 crore, the company's CEO Salil Parekh said, "Our confidence and visibility for the rest of the year is improving driven by our Q1 performance and large deal wins."

The company also gave revenue guidance of up to 2 percent in constant currency terms for the financial year 2020-21.

Earlier on 7 July, Infosys' non-executive chairman Nandan Nilekani said that Infosys was likely to gain as global clients were looking for consolidating their supplier base, as they emerge from the COVID-19 crisis. He said that conversations between industry leaders indicated that clients wanted to consolidate and reduce their number of suppliers.

"That works well for Infosys as it is seen as stable and financially strong. So Infosys will be a net gainer in this," Nilekani said speaking to InfyTV, the company's internal broadcasting channel.

Similarly, TCS on 9 July reported a 10.8 percent increase in Q1 profit at Rs 8,131 crore. "We see customers continuing to spend on their growth and transformation initiatives, and that is showing in our strong order book and deal pipeline this quarter, said CEO Rajesh Gopinathan.

The Tata group company has issued joining letters to over 30,000 fresh graduates. As many as 40 percent of them have been onboarded in June quarter and the rest are expected to join by September, showing that its operations have remained strong despite the pandemic.

Large deals

Along with their financial results, this week, Infosys and Wipro announced large deals.

Infosys announced its strategic partnership with US-based investment company Vanguard for a multi-year IT contract.

On the other hand, Wipro said that it will be acquiring IVIA Servigos de Informatica, a Brazilian IT solutions provider, for $22.4 million. The transaction is likely to be completed in the current quarter ending 30 September 2020.

Technical charts indicate further rally

As Nifty IT index breached 17,000 mark, a Business Standard report citing technical charts said that the rally should move towards 17,500 and 17,700 levels.

In terms of individual companies, as Infosys and TCs hit new all-time highs, a new interest in the stocks could cause the former to surge to Rs 1,100 levels in medium-term while the latter may rise to Rs 2,500, the report said based on their technical analysis.

Mindtree and Wipro are also expected to see similar movement.