Nifty IT index ends 3-month downturn in June, surges 12% to record largest monthly jump since Aug 2021

In June, IT stocks ended their three-month bearish streak, marking one of their strongest monthly performances. This turnaround significantly contributed to the frontline indices, propelling them to break record highs. The robust recovery in the IT sector not only boosted investor confidence but also played a pivotal role in sustaining the broader market rally.

The Nifty IT index concluded the month with an impressive gain of 11.65%, marking the largest monthly jump since August 2021. After a strong performance between December and February 2024, where it saw a cumulative gain of 23%, the index faced selling pressure from March to May.

For the first half of the current year, the Nifty IT index saw a modest increase of 1.81%, marked by three months of negative performance. June emerged as the standout month, significantly boosting the index into positive territory.

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All ten constituents of the index impressively ended June in positive territory. Leading the pack, Persistent Systems gained 16.20%, while major IT companies like Wipro, Tech Mahindra, and LTIMindtree posted gains ranging from 10% to 14.2%.

Other stocks, including Infosys, HCL Technologies, Coforge, L&T Technology Services, Mphasis, and TCS, recorded gains of up to 8%.

What contributed to the recovery in IT stocks?

Speaking about the factors contributing to the strong rebound in IT stocks, Anirudh Garg, Partner and Fund Manager at Invasset, said, "The worst of the sector's downturn appears to be behind us. The advent of artificial intelligence (AI) is bringing new business opportunities to Indian IT companies, allowing them to leverage AI to provide innovative solutions and services.”

“Additionally, there has been a significant shift towards digital transformation across various industries, boosting demand for IT services. The stability in global markets and easing of inflation concerns are also fostering a positive investment climate, attracting foreign institutional investments into the IT sector,” he pointed out.

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Moreover, he notes that the Indian government's emphasis on digital infrastructure and initiatives such as the Digital India campaign is creating a supportive environment for IT companies. He added that the recovery in key global markets and the stabilisation of oil prices are further adding to the optimism in the sector.

Likewise, Mr Atul Parakh, CEO of Bigul, said, "The recent rally in Indian IT stocks is driven by global economic recovery, increased AI and cloud adoption, cost optimisation trends, easing inflation concerns, attractive valuations, and positive company guidance. The outlook for H2 2024 is cautiously optimistic."

He underscored that the positive factors include ongoing digital transformation, potential interest rate stabilisation, and AI investments. Challenges involve global economic uncertainties, margin pressures, and potential spending slowdowns. While long-term growth prospects remain strong, short-term volatility is possible, Atul Parakh noted.

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Will the momentum carry on for the rest of 2024?

Anirudh Garg believes that the rally in IT stocks is poised to continue throughout the second half of 2024. He anticipates that the adoption of AI and other emerging technologies will drive growth, opening up new revenue streams for IT companies. Garg highlights structural changes in the global business environment, such as the shift towards remote work and digital solutions, which are long-term catalysts for the sector.

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While IT stocks may not lead the overall market rally, Garg suggests they have likely reached their lowest point and are now positioned for steady growth. He underscores the sector's robust potential for earnings growth, fueled by ongoing investments in digital transformation and increasing global demand for technology services.

Atul Parakh also believes the rally may continue, but he suggests adopting a more selective approach. He advised investors to prioritise companies with robust order books, diverse client bases, and emerging technology capabilities. Parakh emphasised the importance of a balanced approach, taking into account both short-term fluctuations and long-term potential.

Disclaimer: The views and recommendations given in this article are those of individual analysts. These do not represent the views of Mint. We advise investors to check with certified experts before taking any investment decisions.