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The gloomy demand situation for Indian IT companies may continue in the short term, but analysts expect a pick-up that will drive growth in the sector in the medium to long term. Demand in the Indian IT sector is likely to decline further in the near future due to conservative technology spending by BFSI's US clients. However, promising signs of recovery are emerging, with recent strong deals expected to support growth for Indian IT companies in the medium to long term, brokerage Antique Stockbroking said. The brokerage noted that U.S. bank results remain conservative on technology spending, with most banks reporting lower technology spending as a percentage of revenue.
“Technology spending as a percentage of revenue was 6.5 percent in the first quarter of 2024 and 7.4 percent in the fourth quarter of 2023, compared to an eight-quarter average of 6.8 percent. The overall outlook for banking and consumer sentiment at major banks remains positive, with low unemployment despite rising property and housing prices. In terms of equity prices, banks remain conservative as they see the macroeconomic environment improving and global political uncertainty easing. before investing in mid- and long-term transitional plans, Antik said. Antic emphasizes that customers are spending cautiously and favor investments in services such as data, digital artificial intelligence and cloud technologies. They save money and focus on mission-critical projects that provide an immediate return on investment.
However, order bookings remain strong as companies in the BFSI segment witness pent-up demand, which Antique said is expected to drive growth in the medium to long term. The brokerage firm highlighted the decline in BFSI's revenue in India IT Services' fourth quarter FY2024 results. All major IT companies reported underperformance in the BFSI space, with Infosys and Wipro reporting revenue declines of more than 8%. Most of the corporate comments pointed to high inflation and peak interest rates in the BFSI space. Antique said they played the game and fended off the cautious approach of the big banks. Antic prefers large-cap stocks over mid-cap stocks because further declines can have a greater impact on small and medium-sized companies. In the IT sector, HCL Tech, Tech Mahindra and Mphasis are preferred. Another brokerage firm, MK Global Financial Services, also highlighted that the FY25 forecast reflects weak demand, weak discretionary spending and lack of prospects of improvement in demand in the near term.
MK noted that IT executives' views remain unchanged and there is uncertainty about the recovery timeline. Although the overall pace of decline in business performance slowed, the downward cycle in business performance continued. The brokerage firm expects that the start of a rate cutting cycle will serve as a trigger to signal to clients confidence in the path of inflation and macroeconomic stability, leading to improved demand and an increase in discretionary spending. MK forecasts that the deterioration in IT stock returns will end in the first half of this financial year (H1 2025) if current interest rate cut expectations are met. “The share price correction in recent months has made valuations more reasonable. We prefer large caps over mid caps, Infosys, HCL Tech, Wipro, Tech Mahindra, TCS and LTIMindtree. “Mid-cap stocks, I prefer Cyient, Birlasoft, Zomato, Firstsource Solutions and Mphasis,” Emkay said.
