IT stocks set Street afire; benchmark indices at lifetime highs

The National Stock Exchange’s Nifty hit an intraday high of 21,115.55 while BSE’s Sensex surged to a life high of 73,402.16 on Monday.
The National Stock Exchange’s Nifty hit an intraday high of 21,115.55 while BSE’s Sensex surged to a life high of 73,402.16 on Monday.

Summary

  • HDFC Bank, Reliance Industries support Monday’s market rally

Technology stocks were the star performers on the Street on Monday, lifting the Nifty and Sensex indices to record highs, along with support from blue chips Reliance Industries Ltd and HDFC Bank Ltd. Meanwhile, robust returns from information technology (IT) stocks in the year so far are beginning to raise questions on whether the tech engine still has enough steam left.

The National Stock Exchange’s Nifty hit an intraday high of 21,115.55 while BSE’s Sensex surged to a life high of 73,402.16, as earnings and management commentary from technology leaders last week fuelled buying in these stocks.

Analysts continue to be bullish on returns from tech stocks, but caution that returns would be in line with those of the benchmark index, which they have outperformed over a year. The Nifty IT index was Monday’s top performer, rising 1.86% to 37,201.95.

“Those who are invested should continue to remain so, as the rally will sustain on rising foreign portfolio investor (FPI) inflows into large-cap IT," said veteran investor Ramesh Damani. “The IT names have exceeded expectations on the margin front and things would look better in FY25 than in the current fiscal."

The Nifty closed up 0.93% at 22,097.45 and the Sensex ended 1.05% higher at 73,327.94, as Infosys Ltd, Tata Consultancy Services Ltd (TCS) and Wipro Ltd hit 52-week highs, and HCL Technologies Ltd surged to a record high. FPIs net purchased shares worth 1,085.72 crore while domestic institutional investors (DIIs) sold shares worth 820.69 crore.

These IT companies’ December quarter results released over Thursday and Friday turned out to be better than Street expectations, and investors expect their earnings to improve with interest rates expected to cool worldwide later this year.

Despite several brokerages putting ‘sell’ recommendations on Wipro after its earnings announcement, the stock opened at the 10% upper price band of 511.95 and rose to a 52-week high of 529. TCS and Infosys also hit their 52-week highs at 3,965 and 1,664.95, respectively, on high delivery volumes and short-covering in derivatives contracts. HCL Tech hit a record high of 1,619.60, also on robust buying. Wipro and HCL Tech reported their Q3 results on Friday, while the other two posted them on Thursday.

The two-day rally in the large-cap tech stocks has enabled the Nifty IT index to post a 28.06% return in the year to 15 January, beating the Nifty’s 23.06% return in the same period.

Asked whether investors could enter tech counters at current levels, Andrew Holland, chief executive officer, Avendus Capital Public Markets Alternate Strategies, said, “Those with a long-term horizon, say, for two years, could, because their results and guidance have been better than what the markets were expecting. Markets are viewing the IT pack with favour in the belief that they’ve seen the worst."

Jayesh Bhanushali, lead analyst, IIFL Securities, advises entry in a “staggered manner" as the IT index’s price-to-earnings (P/E) multiple at 26 times FY25 earnings trades 30% above its historic average. He added that Infosys was the brokerage’s top pick, with its P/E ratio at 25.43 times against TCS’s 29.99 times.

The FPI under-ownership is evident in the heavyweights. For instance, in the December quarter, FPI ownership in Wipro was 7.46%, down from 9.87% a year ago. Similarly, in Infosys, the corresponding figures was 30.9% (32.59%), and in TCS 12.69% (13.16%). The current quarter could witness some buying, after FPIs sold $117 million worth in the IT sector in the December quarter, as per National Securities Depository Ltd data.

Mutual funds have been buyers, raising stakes year-on-year in all of these companies in the December quarter, save HCL Tech.

In terms of point contributions, HDFC Bank and Reliance Industries were the top stocks, accounting for 45% of the Nifty move. They were followed by Infosys (32.12 points), Bharti Airtel Ltd (15.07 points), HCL Tech (11.47), ICICI Bank Ltd (10.19) and Wipro (9.40).

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