IT stocks rise as bears cover shorts, with a new outlook

Mumbai: Information technology (IT) stocks were the biggest gainers in Wednesday's trading, after HCL Technologies' stronger-than-expected earnings outlook prompted traders to cover some of their bearish bets that were initiated after earnings announcements of its larger peers --TCS and Infosys.

The Nifty IT index shot up 4.3% - posting its biggest single-day gain in 10 months. HCL surged 7.74%, followed by Coforge, Oracle Financial Services Software, LTI Mindtree and MPhasis, which ended 5-6.4% higher. The surge in IT stocks helped the benchmark Nifty close 0.67% higher on Wednesday.

"What drove up IT stocks today was HCL Tech's FY26 guidance, and because most sector-specific headwinds appeared to be priced in after the recent fall," said Sumit Pokharna, vice president, fundamental Research, Kotak Securities. "Additionally, it was supported by gains in the Nasdaq on Tuesday."

The Nasdaq Composite, an index laden with US technology giants, rose 2.7% on Tuesday.

HCL Tech's management forecast a 2-5% growth in revenue in FY26, which was better than that of Infosys.

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The Nifty IT index has declined 18.3% this year, as an anticipated slowdown in the US economy due to tariff war is likely to impact the sector's revenues adversely. Top IT firms derive a major chunk of their revenues from the US and Europe. This led to multiple downgrades and price cuts in the sector, resulting in investors shifting to other themes like banks and financials.

"We're are seeing a rotation of capital from sectors that have already rallied (banks). Investors are attracted to more reasonable IT valuations," said Pokharna.

HCL's outlook could be prompting some investors to reconsider IT stocks. Apart from cheaper valuations, investors are not betting on a rebound in the sector's prospects soon.

Rakesh Vyas, co-chief investment officer and portfolio manager at Quest Investment Advisors said FY27 may be a better year for the IT sector than FY26.

“From FY27 onwards, revenue growth is expected to pick up, supported by an increase in cost optimisation initiatives and vendor consolidation,” he said. “These trends could lead to greater technology outsourcing by the US enterprises, potentially translating into low-teens earnings growth over the medium term for IT services companies.”

TRADING BETS OR VALUE PICKS?
Money managers and analysts said the rebound in IT stocks could at best be a trading opportunity. “The recovery in broader benchmark indices has likely triggered short covering in the IT index, and this momentum could sustain through the April monthly expiry,” said Vyas. “This offers near-term trading opportunities in the sector.”

Chandan Taparia, head of technical and derivatives research at Motilal Oswal Financial Services, said short positions are still intact in IT stocks as it has been the underperforming sector recently and there may be some recovery led by short covering in the coming days as well. Pokharna prefers to be choosy about buying IT stocks at current levels.

“Given the recent rally in HCL Tech, we suggest waiting for a more favorable entry point,” he said. “Our preferred large-cap picks are TCS, Infosys and Tech Mahindra, and Coforge in the mid-cap space.” Vyas suggests investors wait for a dip before buying. “Over the past four months, valuations in the IT services sector had moderated, aligning more closely with long-term averages,” said Vyas. “However, the recent sharp rally appears somewhat overdone, and investors may consider waiting for a more attractive entry point, ideally 8–10% below current levels.