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IT: Stocks correction amid mixed near-term signals

ICICIdirect Research 20 Sep 2024 DISCLAIMER

The Indian IT stocks witnessed a correction during the week amid a rate cut by US FED. A key reason for the correction can be attributed to the appreciation of INR against the US dollar which remains detrimental for the Indian IT. It was also compounded by Accenture’s decision to delay staff promotions to June from December, reflecting a challenging consultancy environment dampening optimism and raising concerns about broader impacts on employee growth and sector performance. Moreover, we see that Nifty IT has had a run-up of 30%+ from June and so now this correction can be seen as the index cooling off a bit.

While a 50-basis point cut in interest rate by US FED, is expected to prompt a revival in the discretionary demand for IT services companies, the final impact may become evident by FY26 only. Despite the likely medium term positive outlook for future spending, near term impact will also be determined by US election outcome.

Our outlook remains positive in selective areas where the discretionary demand will pick up, but we believe overall broader growth shall return in FY26 only. We continue to be selectively positive where there are tailwinds of superior growth, AI led investment or discretionary spend pick up and we prefer Sonata, Firstsource and Birlasoft in the small to mid-cap space and TechM in the large cap space.

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