TCS, Infosys, HCL, Other Tech Stocks Dip 3-7%; Why Nifty IT Index Fell 1,600 Pts Ahead Of Fed Policy? BUY/SELL

Sensex and Nifty 50 erased their early record high gains in the second half of trading session of Wednesday, September 18, 2024. Ahead of Fed meeting outcomes, in the early trade, Sensex and Nifty touched a new lifetime high of 83,326.38 and 25,482.20 respectively, however, the benchmarks are now trading in red with a 70-200 points drop. The reason? It is the free fall in tech stocks that have dragged the Indian stock market. To be precise, the Nifty IT index nosedived by over 1,600 points. All tech giants witnessed a steep bearish trend.

Nifty IT index nosedived by 1,600.6 points to hit an intraday low of 41,814.40. All tech stocks listed on the index are in red.

Mphasis share price took the most beating, with a decline of 6.8%, followed by L&T Technology Services and Persistent Systems which dropped by 4.6% and 4.7%.

Further, top tech giants like Tata Consultancy Services (TCS) and HCL Tech slipped by 4.3% and 4.1% respectively. Also, stocks like Tech Mahindra, Infosys, Wipro, Coforge and LTMindtree plummeted by 3-4%.

The reason why IT stocks tumbled is because investors opted for booking profits ahead of anticipation of the 25 bps rate or 50 bps rate cut from the US Federal Reserve later on September 18. The Nifty IT index has been on gains for over a year now.

The Nifty IT's 30-day performance is on the upside of 6.21%. While the 365-days performance of Nifty IT has robust gains of 31.05%. Nifty IT index has outperformed the Nifty 50 whose 1-year gain is over 26%.

As per JM Financial, a Fed rate cut is almost a certainty now. Its impact on the IT Services sector, we believe, could be three-pronged - a) lower cost of equity driving up stock multiples; b) discretionary demand revival as the economy recovers; and c) lower interest burden on corporates opening up room for higher opex (hence IT Services).

Explaining in detail, JM's note highlighted that the first case - which is of higher multiples - has already played out to an extent. Meanwhile, the second case is contingent on the economy's landing variety (soft/hard) and hence still fuzzy at this stage. The third factor - lower interest burden - is the most tangible impact of lower rates.

JM's note said, "We therefore delved deeper here, analysing leverage, interest expense and opex movement of S&P500 companies (ex-financials) through the latest rate hike cycle."

Further, JM observed three trends - a) the trajectory of interest cost increase for corporates across sectors has been far more gradual than that of fed-rate; b) most sectors/sub-sectors have de-leveraged, albeit marginally, over the past four years; c) opex - as a % of revenue - has
trended down across sectors.

"These trends suggest, quite logically, that corporates optimised debt and operations to cushion the higher interest cost. This is most prominent in Manufacturing and CME (Communication, Media and Entertainment) sectors," JM said.

Moreover, JM believes the recent uptick in sector multiples already reflects expectations of a fed rate. This, JM believes, shows up in the yield differential of NIFTY-IT and US 10-Y Bond.

It added, "NIFT-IT earnings yield slipped below US10Y bond yield towards Dec-2023 when Fed commentary turned dovish. NIFTY-IT's earnings yield has since stayed below US 10Y Bond yield likely in anticipation that bond yields will come down. We therefore believe the impact of the fed-rate cut on IT Services PER multiples is largely in the price."

On company-wise, JM's note said, "A reversal (of opex cuts) should benefit TECHM more. Although, longer-tenured debt likely limited transmission of rates. By extension, it means the rate-cut impact (on spends) will be gradual too. Expectations of rate cut improving corporates' ability to spend instantaneously might
therefore be a bit premature. Our optimism, instead, is based on a likely attenuating spend optimisation cycle. We have elaborated these earlier in BFSI rebound: De-"Banked" 2.0 and New overtakes old. That should hold irrespective of Fed's rate decision."

Which Stocks To Buy? JM said INFO/TECH/WPRO among large caps and PSYS/KPIT among mid-caps remain its preferred picks in the sector.

Tier-1 IT Stocks:

- BUY Infosys For Rs 2010 Target

- HOLD TCS For Rs 4140 Target

- HOLD HCL Tech For Rs 1550 Target

- BUY Wipro For Rs 620 Target

- BUY Tech Mahindra For Rs 1770 Target

- SELL LTIMindtree For Rs 5050 Target

Tier-2 IT Stocks

- BUY Persistent Systems For Rs 6030 Target

- BUY Coforge For Rs 6770 Target

Tier-3 IT Stocks

- BUY Tata Technologies For Rs 6770 Target

- BUY KPIT Tech For Rs 2140 Target