IT stocks gain for 3rd day on rupee fall, tempered AI view

The Nifty IT index jumped 3.2% on Tuesday and clocked 7% gains in three sessions, signalling a turnaround after a prolonged bout of downsides. The benchmark Nifty, which ended 0.1% lower, is down 0.3% in the past three days.

Coforge, Infosys and LTM (erstwhile LTI Mindtree) gained 4-5% on Tuesday, while other constituents were up between 1.7% and 3.2%.

“The rupee hitting fresh lows has improved sentiment around IT companies, as it could lead to a 150-200 basis point improvement in their margins,” said Anshul Jethi, research analyst, LKP Securities.

The rupee made a record low of 96.61 against the dollar on Tuesday.

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SOME TURNAROUND: Weakening rupee could provide a margin boost l Analysts talk of investor overreaction to AI, but warn that any rebound may be marked by sharp swings

As software services exporters earn most of their revenues in US dollars, a weaker rupee against the dollar boosts their margins.
According to Sushovon Nayak, research analyst at Anand Rathi Institutional Equities, recent developments such as the Globant management highlighting the importance of IT services firms in AI implementation, Cognizant increasing its buyback size, and some weakness in leveraged US AI-infrastructure stocks on the back of higher US bond yields, have improved investor sentiment towards the IT sector. The Nifty IT index is down nearly 23% this year, against Nifty 50’s fall of 9.7%, as the launch of new AI tools, aimed at increasing productivity, is perceived to be a threat to the business of traditional IT services providers.

Investors may have overreacted to concerns around AI taking the place of traditional software systems, said analysts.

“Our recent interactions with TCS management suggest that nearly 95% of enterprises still operate on legacy models and have yet to meaningfully adopt AI, indicating growth opportunity for the sector remains,” said Sumit Pokharna, vice-president – fundamental research, at Kotak Securities.

“However, part of the cost benefits to these firms from AI is likely to be passed on to clients, which may lead to revenue deflation,” he said.

The sharp recovery in the past three sessions comes as valuations of top Indian software exporters fall to the levels seen in the global financial crisis in 2008-09. Tata Consultancy Services (TCS), Infosys, HCL Technologies and Wipro are trading at trailing price-earnings (P/E) multiples between 15 and 18, the lower end of the spectrum, indicating lower-than-average valuations.

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The rebound may continue, but it will be marked by sharp swings amid intermittent concerns around AI product launches.

“We expect a J-curve recovery in IT revenues going ahead,” said Nayak. He likes LTM, Tech Mahindra and Infosys amongst the large caps, and prefers Mphasis and Persistent Systems in the mid-cap IT space.

Pokharna said large-cap IT valuations remain attractive, and he maintains a positive view on TCS, Infosys and Tech Mahindra.

“While LLM companies may disrupt market shares of traditional IT players and FY27 could remain challenging for the sector, AI adoption could improve their productivity,” said Jethi, who is positive on Persistent Systems and HCL Technologies. “Valuations in the sector have also turned attractive enough for investors to take a contrarian view on the AI theme.”