Earnings season is approaching, will Indian tech stocks stop rising?

Can the rebound of Indian technology stocks continue? With the upcoming earnings season next week, the Indian stock market may face pressure.

Recently, analysts from Citigroup and Jefferies issued warnings that Indian technology stocks may not sustain their strong rally due to overvaluation and uncertainty in profit prospects.

Since the end of October, the NSE Nifty IT index (including 10 software giants) has risen by about 17%, surpassing the nearly 15% increase in the NSE Nifty 50 index.

Analysts Surendra Goyal and Rajiv Berlia from Citigroup Group stated in a report released on January 2nd that Indian technology stocks have been rising due to the backdrop of macroeconomic headwinds and expectations of significant improvement in profit margins. However, the current valuation is already at a high level, and they maintain a cautious attitude towards the technology stocks' earnings report for the fourth quarter, which will be announced next week.

Analysts predict that in the fourth quarter ending in December, the revenue of leading Indian software companies will remain flat compared to the previous quarter, due to reduced discretionary spending by customers and higher-than-expected vacations this quarter.

Can the rally of Indian technology stocks continue?

Data compiled by the media shows that the forward price-to-earnings ratio of Nifty IT has reached 26.4 times, a premium of 31% over the benchmark Nifty index, far higher than the five-year average.

On December 29th, Kotak Securities stated in a report that the market's focus will shift from future investments of technology companies to cost-cutting, so the upcoming earnings season is expected to "not inspire investor confidence."

Citigroup Bank, citing potential profit risks, has a negative outlook on four software exporters, including Indian IT software services giant Wipro, while ICICI Securities downgraded the ratings of the five stocks it covers before the earnings season starting on January 11th.

Analysts believe that whether the rebound of technology stocks can continue depends on two aspects: the future revenue guidance of Indian software services companies and whether the wave of generative AI can continue to drive revenue growth in 2024.

Looking at the composition of the Indian stock market, the financial (35%), information technology (13.6%), essential consumer goods (9.2%), discretionary consumer goods (8.3%), and industrial (6%) sectors have a higher weight in the Nifty 50 index. The rise of the information technology, consumer, and financial sectors in 2023 is the main driving force behind the rise of the Indian stock index.

Can the eight-year bull run in the Indian stock market continue?

In 2023, the Indian stock market closed with an eight-year bull run, with the Nifty 50 index rising by 20% and the Sensex30 index rising by 18.7%. It ranked second among major markets in the Asia-Pacific region, only behind the Nikkei 225 and the KOSDAQ in South Korea, leading the emerging stock markets in the Asia-Pacific region.

Data from the National Stock Exchange of India (NSE) shows that the rise in the Indian stock index in 2023 was mainly driven by EPS growth. It is expected that the profit growth rate of the Nifty 50 index in 2024 will be 12.9%. The steady growth of India's GDP has laid the foundation for the profitability of listed companies and supported the valuation of the stock market.

In terms of market capitalization, the Indian stock market surpassed the $4 trillion mark as of December 6th, and the total market capitalization has roughly doubled since the low point in March 2020.

The record high in the Indian stock market is supported by fiscal stimulus. In the 2022-23 fiscal year, the fiscal deficit of the Indian central government narrowed slightly to 6.4% compared to the previous fiscal year. However, including the deficits of various states, India's overall fiscal deficit still stands at 9.4% of GDP, reaching a 20-year high. According to the goals set by the Indian Ministry of Finance, the central deficit as a percentage of GDP is expected to decrease to 5.9% in the 2023-24 fiscal year and further decrease to 4.5% by the 2025-26 fiscal year.

According to analysis by Wall Street Journal, the imbalance between the current account balance and fiscal deficit in India may pose financing challenges and currency pressures, thereby affecting the relative returns of the Indian market.