Jefferies advised investors to remain selective when it comes to IT stocks, pointing to cautious management commentary, sharp stock movements and rich valuations.

What Happened: The brokerage warned that there is limited scope for margin expansion in FY25 due to slower revenue growth.

It did point out that the U.S. Federal Reserve’s larger-than-expected 50 basis points interest rate cut has shifted investors’ focus toward the IT sector, as a weaker dollar could help revive client spending and reduce interest burdens on firms.

The rate cut is also expected to allow more operational expenses and potentially drive new deals. However, management teams at HCL Tech, Tech Mahindra and LTIMindtree have indicated no significant change in the demand environment, Jefferies said in a note.

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Where’s The Growth? While Indian IT companies continue to win deals, Jefferies noted that these are largely focused on cost-cutting and vendor consolidation programs, rather than growth-driven projects.

Indian IT companies, which generate a large portion of their revenue from the US, have seen reduced discretionary spending due to macroeconomic uncertainty, high borrowing costs and inflationary pressures. The Fed's rate cut could provide relief to IT stocks, allowing companies to borrow and spend more, but recession fears remain.

The broader U.S. economy is facing challenges, with a softening labor market and concerns over a potential recession.

Price Action: The Nifty IT index was the worst-performing sector on Tuesday, down around 0.44% in early trade.

Infosys’ share price was down 1% at ₹1876.65, TCS was trading flat at ₹4,265.05 and Wipro lost 0.67% to trade at ₹531.30.

Meanwhile, LTIMindtree and Tech Mahindra eased 0.92% and 0.22% to ₹6,268 and ₹1,603.55, respectively. HCLTech’s share price climbed 0.27% to ₹1,757.45 in early trade.

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