TCS in for some bounce after a good Q4 show

TCS shares advanced 0.48% to ₹4,004 on Friday ahead of the company's January-March earnings. The Nifty IT index ended 0.78% lower on Friday, while the benchmark indices fell over 1%. Analysts said the activity in TCS stock futures and options suggested near-term optimism.

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"There was a short-covering action in the April series for the stock and the open interest also shed 9%, indicating a positive outlook from a derivatives perspective," said Rajesh Palviya, senior vice president of research-technical and derivatives at Axis Securities. "The call positions have also moved up implying buying interest." Palviya said traders could bet on the stock with a target of ₹4,140-4,200 and a stop loss of ₹3,960 as there is an expectation of a pullback

In the previous three financial years, TCS shares have consistently declined by more than 3% in the subsequent week after the fourth quarter result announcements, said analysts.

Despite the stronger-than-expected fourth-quarter results, prevailing uncertainties in the global financial markets may temper immediate bullishness.

"While TCS reported strong Q4FY24 performance, escalating tensions between Iran and Israel could inject uncertainty into Monday's market behaviour," said Siddhesh Mehta, research analyst at Samco Securities. "TCS suggests a potential upside movement to ₹4,400 with investors advised to consider buy-on-dip till ₹3,800."

TCS shares have gained over 5% so far this year and moved up 2.17% so far in April. In the last one month, the company's shares dropped 5.1%.

Analysts said that Accenture's guidance on weak discretionary spending and the TCS management commentary on not-so-strong revenue growth despite the deal wins indicate a softer demand outlook.

“Despite the strong order book, the management guidance on future revenue growth guidance remained uncertain which indicates the pressure of low discretionary spending leading to muted revenue expectations,” said Pokharna. Mehta said that the broader IT sector is expected to report significant deal wins during the quarter amid growing demand for cloud services, data platforms, and generative AI. However, revenue growth across the sector is likely to be muted.

Analysts said other IT stocks will take cues from the bellwether till peers Infosys, HCL Technologies and Wipro announce their revenue guidance. Their business outlook for FY25 is expected to set the tone for future quarters.

“The TCS results are likely to rub off on its peers and witness a bullish run since TCS is a bellwether company,” said Palviya. “There could be a cut down in short positions leading to an upward pullback, but the final reaction will come in post their results.”

Palviya said Wipro, HCL Tech, and Tech Mahindra are some peers that are holding ground at key near-term support levels.

IT stocks could also be weighed down by the diminished likelihood of three interest rate cuts by the US Federal Reserve in the current year. Pokharna said the delay in rate cuts means the demand outlook remains uncertain and the weaker peers are more likely to get hit by this than strong players.

The IT sector constitutes almost 14% of the Benchmark Nifty and TCS is a top constituent of the index with a weight of 4% as of March 2024.

“Although TCS’ performance often influences overall market movements, the extent of market propulsion in the next sessions could be tempered by reactions from other index constituents, particularly amidst escalating tensions between Iran and Israel,” said Mehta.