Despite seasonal challenges, analysts see FY25 as the turning point for the sector’s growth
As the Q3 results season begins on Thursday, January 9, with Tata Consultancy Services (TCS) announcing its December quarter results, foreign institutional investors (FIIs) have significantly increased their investments in Indian IT stocks. FIIs have added IT stocks worth over $1 billion to their portfolios, demonstrating strong confidence in the sector despite seasonal challenges.
In December, FIIs invested a net ₹15,446 crore in the Indian equity markets. Out of this, approximately two-thirds, amounting to ₹9,050 crore, was directed toward IT stocks, according to data from NSDL. This notable allocation underlines the growing optimism around the sector’s medium- to long-term prospects, even as Q3 is expected to be seasonally weak.
Q3 Performance Expectations for IT Companies
The December quarter has historically been a challenging period for IT service exporters due to holidays and furloughs, leading to a mixed outlook for Q3 results. However, FIIs seem to be looking beyond short-term hurdles, betting that FY25 could mark the bottom of the revenue growth cycle for the industry.
TCS: The results from TCS, scheduled to be announced on January 9, 2025, will set the tone for the sector. Analysts anticipate steady performance, driven by large deal wins, but revenue growth could remain modest due to seasonal factors.
Infosys: Infosys is scheduled to announce its Q3 FY25 earnings on January 16, 2025. The company is navigating a challenging period, with the second half of the fiscal year traditionally weaker. Analysts expect lower-than-anticipated revenue growth and margin compression for the December quarter, reflecting the ongoing seasonal impact and macroeconomic uncertainties.
Wipro: Wipro will release its Q3 FY25 results on January 17, 2025. The company has recorded a 20% year-to-date gain, delivering robust returns to investors. Analysts remain optimistic about its ability to maintain this momentum, particularly if it implements changes to its capital allocation policies, potentially boosting investor confidence further.
Factors Driving FII Interest in IT Stocks
Several factors contribute to the heightened FII interest in Indian IT stocks:
Sector Resilience and Growth Potential: The IT sector remains resilient despite global economic challenges. Strong demand for digital transformation services and increasing adoption of emerging technologies like AI, cloud computing, and cybersecurity solutions have bolstered the sector’s prospects.
Attractive Valuations: A period of muted performance in the first half of FY25 has resulted in relatively attractive valuations for major IT firms. FIIs view this as an opportunity to acquire shares at a discount, with the expectation of growth recovery in FY25.
U.S. Federal Reserve Policy Expectations: Anticipation of a potential rate-cut cycle by the U.S. Federal Reserve has improved global liquidity conditions, encouraging foreign investors to increase allocations in sectors with global exposure, like IT.
Stable Rupee: A relatively stable Indian rupee against the U.S. dollar has provided additional support to IT companies, which derive a significant portion of their revenues from exports.
Strong Capital Allocation Policies: Companies like Wipro and Infosys are under focus for their shareholder-friendly policies, including potential buybacks and dividend payouts, which have boosted investor confidence.
Sector Trends and Insights
The Indian IT sector has demonstrated adaptability in navigating macroeconomic uncertainties, supported by robust deal pipelines and diversified client bases. Large-cap IT firms, including TCS, Infosys, and Wipro, continue to lead the sector with their established market presence and strong execution capabilities.
Mid-cap IT stocks have also attracted FII attention due to their higher growth potential and competitive pricing strategies. Companies in this segment are poised to benefit from rising global demand for specialized IT services, particularly in niche areas like cybersecurity and data analytics.
Market Sentiment and Performance
FII inflows have positively impacted market sentiment, leading to appreciable gains in IT stock prices. The Nifty IT index has outperformed other sectoral indices in recent weeks, reflecting growing optimism about the sector’s near-term performance and long-term growth trajectory.
While Q3 results may highlight seasonal pressures, the outlook for FY25 appears promising. Analysts expect a gradual recovery in revenue growth, supported by increasing IT budgets from global clients and strong demand for next-generation digital services.
FIIs are strategically betting big on Indian IT stocks ahead of the Q3 results season, driven by confidence in the sector’s long-term growth potential and favorable macroeconomic conditions. Despite the seasonal challenges of the December quarter, the focus remains on FY25 as a pivotal year for revenue recovery and margin expansion.
With robust deal pipelines, strong capital allocation policies, and an improving global outlook, the Indian IT sector continues to be a preferred choice for FIIs seeking growth and stability in their portfolios. This trend underscores the critical role of the IT industry in driving India’s economic growth and its appeal as an investment destination in global markets.
