The IT stocks have outperformed the benchmark indices since the beginning of 2019. The Nifty IT index gained over 3 percent in August and 11 percent in 2019. In comparison, the Nifty has fallen nearly 1 percent in August while risen 1.4 percent in 2019.
Among stocks, NIIT Tech rose over 20 percent in the last 1 month, while Tech Mahindra gained around 11 percent. HCL Tech, Infosys, and TCS also advanced between 3-10 percent during this period.
Meanwhile, for 2019, NIIT Tech surged nearly 30 percent, whereas, Infosys and TCS added over 20 percent each. HCL Tech was also up around 16 percent.
The rise in the sector has mainly been due to fall in the rupee versus the dollar.
In August, the rupee hit 72/dollar, its weakest level in 2019. Domestic factors like dismal growth in direct tax collection in the current fiscal, which further reflected the economic slowdown, uncertainty about fiscal stimulus, FII outflows weighed on the currency.
Apart from rupee depreciation, robust deal wins, growth in the digital segment also added to the positive sentiment.
The outlook for the sector, however, remains muted for FY20 due to worsening economic slowdown. The analysts expect the margins to be under pressure in the near-term, but overall, they remain bullish on the sector.
"We maintain our overweight stance on the sector and expect revenue growth to revert to low double digits in FY21. We maintain 'buy' rating on TCS and Wipro. Tech Mahindra remains our only 'sell' amongst the large caps," Phillip Capital said in a report.
For Nomura, HCL remains the top pick in the sector. It has 'neutral' rating on Tech Mahindra and TCS, and 'reduce' for Wipro.
However, risks to global GDP due to trade war and their likely impact on demand in light of rich valuations at IT service companies compared to risks in the domestic market takes precedence, Nomura commented.
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