IT sector takes the lead in 2023; Nifty IT gains 10% YTD

From the heavy sell-off seen in March 2020 amid the COVID-19 pandemic rout, Indian IT stocks staged a sharp recovery till the end of 2021. The Nifty IT index surged over 200% during this period. However, Indian tech stocks again came under selling pressure in the year 2022 amid global headwinds. Nifty IT was one of the worst losers in 2022 as the index had shed over 26% in the past year.  

However, it is now posing a gradual comeback and over the past month, it has become one of the best-performing sectors in India. Even though the benchmark equity index Nifty has fallen more than a percent in 2023 YTD, the Nifty IT index has outperformed the benchmark by gaining around 10% this year.

Here are some of the key reasons that can be attributed to the renewed investors’ interest in Indian IT stocks.

Better earnings

One of the leading contributors to the gains in IT services stocks is better than expected earnings for the third quarter ended December 2022 that certain tech companies have delivered. In Q3FY23, the IT heavyweights delivered on-year growth in topline of between 14-20%. On a sequential basis, the revenue growth for the large IT pack ranged between 3-8%.

Global performance

Another major factor is the performance of global IT companies. In the US, NASDAQ has performed splendidly and is up 13% over the past month. Typically, Indian IT stocks tend to perform in line with global tech stocks. The outperformance of large tech companies in the US has led to some buying interest in Indian tech stocks as well. However, other than IT services stocks, the consumer tech stocks on the Indian bourses have also shown strength.

Value buying

After the sell-off in IT stocks in 2022, many investors have taken the opportunity to make long-term investments in quality IT companies at relatively fair valuations. Investors opted for value buying in some of the beaten-down tech stocks in India.

Ebbing fears of recession

Given the gloomy macroeconomic situation worldwide, global risky assets underwent massive selling by investors. However, the intensity of recession fears in developed countries seems to be easing and central banks around the world are going for a slower pace in interest rate hikes.

Despite persistent selling pressure from foreign investors in the Indian markets, Nifty IT has seen a remarkable recovery. Should the global macroeconomic environment sustain its improvement, Indian IT stocks may remain in focus for investors worldwide.