TCS, Wipro, other IT stocks rebound up to 6%, snapping 8-day losing streak. Why is Jefferies cautious?

Following a significant eight-day decline, IT stocks from companies like TCS, Wipro, and Coforge rebounded by up to 6% on Wednesday, ending a prolonged losing streak, though brokerage firms remained cautious looking ahead to the upcoming Q2 earnings season. The Nifty IT index soared nearly 3% to 28,380 in the early morning hours after a drop of over 5% in the preceding week.

IT stocks were among the top gainers on the market as the US dollar strengthened further, marking its best month since June. This surge occurred following the Federal Reserve's renewed focus on curbing inflation, which has pushed interest-rate expectations and US bond yields higher. The Bloomberg Dollar Spot Index climbed 1.9% in September, reaching its highest level in two months, buoyed by strong US economic data and heightened inflation risks.

India's major IT companies generate a substantial portion of their revenue from the US, meaning a stronger dollar means they receive more rupees for the same revenue earned in the US, thereby boosting sentiment for IT stocks. Notable share gains included Coforge, which surged around 6%, while LTM, Mphasis, Persistent Systems, and OFSS each jumped around 4%.

Tech Mahindra, Wipro, and TCS shares increased by 3%, with Infosys shares rising by approximately 1%. Despite the optimism, analysts from various brokerages are cautious ahead of the Q2 earnings season, especially for large IT firms, with Jefferies predicting the weakest Q2 growth in three years for the industry, with aggregate margins improving by 30 basis points sequentially, supported by currency tailwinds.