IT sector outlook: Sell into the FOMO rally, says Nirmal Bang, cuts FY25 revenue estimates of IT stocks under coverage
Nirmal Bang remains cautious about the IT sector as it emphasises investors use the market rally to pare positions in IT stocks if overweight, especially in the tier-2 set. The brokerage firm has cut the FY25 revenue estimates for almost all its coverage as it expects a shallow US recession in 2024. "We advocate that investors use the ‘delayed/no landing’ rally seen since October 2022 to pare positions if overweight, especially in the tier-2 set," Nirmal Bang said in a note on September 26.
"We reiterate our ‘sell’ rating on almost our entire IT coverage universe, except Tech Mahindra. We have upgraded Tech Mahindra from a ‘sell’ to an ‘accumulate’ as we feel that margin expansion in FY26 may surprise on the upside under new management. We have tweaked our estimates and target prices from the ones given post-Q1FY24 results.
The key change we have made is to cut FY25 revenue estimates for almost all our coverage as we now expect a shallow US recession to be a 2024 event," said Nirmal Bang. Notably, expectations that the US economy will achieve a soft landing and there will be no recession in the US despite continuous rate hikes by the US Fed have underpinned market sentiment and supported IT stocks significantly. The IT index, along with the broader market indices, has been witnessing a rally driven by the FOMO (fear of missing out) factor.
In the last one year, the Nifty 50 has gained about 16 per cent while the Nifty IT index has risen over 21 per cent. Nirmal Bang pointed out that the Nifty IT index jumped by about 108 per cent from December 31, 2019, till September 19, 2023, while Nifty gained nearly 62 per cent in the same period. This massive outperformance of Nifty IT has been on the back of pandemic-driven digital
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