IT stocks gain up to 5% led by Wipro, Infosys. Is it ECB impact or something else?

Coforge, LTIMindtree, Tech Mahindra, MPhasiS, L&T Technology Services, HCL Technologies and Tata Consultancy Services (TCS) gained between 3.85% and 2.13%.

Analyst Nilesh Jain, Assistant Vice-President (AVP) at Equity Research Technical and Derivatives at Centrum Broking sees multiple levers at play. One he said was the IT sector hovering in an oversold category. He said a bounceback was long overdue.

On technical charts, the Nifty IT index has seen a breakout from its 200-day moving average (DMA) and a further near-term upside of 3-4% cannot be ruled out, Jain observed.

The analyst does not see a material impact of a 25 bps rate cut by the European Central Bank (ECB) after a gap of 5 years. European stocks closed in the green on Thursday.

Echoing similar sentiments, analyst Sudeep Shah regarded traction in IT stocks as a short covering by traders along with bargain buying at lower levels. He also sees a very limited role of the ECB’s decision in Friday's spike of the Indian IT stocks. Ahead of the Federal Reserve's FOMC meeting on June 11-12, there could be some of the US Fed taking cues from the ECB decision and nothing beyond it, he said further.

After remaining an underperformer in the current calendar year, JM Financial believes that Nifty IT (NSEIT) might be ready to take a U-turn while suggesting to start overweighting the large cap stocks.

The top 5 constituents cumulatively hold 81% weight in the index. These are Infosys (7%), Tata Consultancy Services (25%), Tech Mahindra (11%), HCL Technologies (10%) and Wipro (8%).

The Nifty IT index had witnessed 7.7% decline in the year so far as opposed to the Nifty50 index surging by 1.4%, while the ratio of NSEIT viz-a-viz the Nifty has declined to 1.48 levels against a high of 2.25 levels in December 2021. This indicated a massive underperformance of 34% in a span of 2.5 years.

“With the index trading in a range, we believe it has a potential to move towards 1.72-1.75 levels in the near term,” said Neeraj Agarwal, analyst at JM Financial.

Citi in a note said while IT Services sees a defensive perception, it could benefit in the near term while remaining cautious on the business prospects of the sector.

V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services, said sectoral preferences could change going ahead even as the comes to terms with "unexpected election results". He sees IT witnessing growing investor preference along with other defensive plays like FMCG and healthcare while momentum plays are expected to slow down.

Investors can start nibbling at high quality largecaps in IT, financials, autos and capital goods, he advised investors.

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