India's information-technology stocks are poised to beat their global semiconductor rivals by the most in two decades this week, with analysts saying the sector is set to keep outperforming as the artificial-intelligence rally unwinds. An index of India's biggest software exporters surged 7.5% this week through Thursday, while a MSCI gauge of global chip stocks tumbled 7.4%, putting the former on course for the biggest weekly outperformance since 2004.
AI shares have tumbled in recent days as slowing revenue growth, concerns about infrastructure financing, and renewed fears of rate hikes have fueled concerns that the companies are overvalued. Rajat Agarwal, an Asia strategist at Societe Generale SA in Bengaluru, said that if the correction in semiconductors gains momentum, foreign investors will start looking at Indian IT stocks. There have also been positive signs for the sector. HCL Technologies Ltd. raised its full-year sales growth guidance this week, while Ireland-based Accenture Plc said it expects to increase revenue growth and profit margins through 2029.
India's largest IT firms were swept up in a global selloff in software stocks earlier this year, as some investors feared that AI could disrupt their business models. The Nifty IT index has climbed almost 20% from its July low, but it is still down 19% this year. Morgan Stanley analysts led by Gaurav Rateria wrote that although valuations appear reasonable, the sector lacks near-term catalysts. Software stocks are now the cheapest they have been since the pandemic year, trading at less than 17 times their one-year forward earnings.
The sector's bellwether, Infosys Ltd., is due to release its second-quarter earnings on Oct. 23, with the Bengaluru-based firm expected to report revenue growth of just 1.8%. Some in the market see a longer rebound ahead. Sumanta Khan, fund manager for equity at Edelweiss Asset Management Ltd., said that while early stages of past technological transitions saw a slowdown, they were immediately followed by a longer period of growth.
Source: Bloomberg Markets · Summarized by HeadlinesBriefing