Samvat 2081: Will IT sector’s fortune change after US elections uncertainty ends? 5 experts weigh in

Samvat 2081:Over the past year, the Indian IT sector has shown impressive resilience. Despite worries about a demand slowdown and high interest rates in major markets, the Nifty IT index has surged 36 per cent since last Diwali, outpacing the Nifty 50’s 25 per cent rise and proving that tech stocks are still a step ahead in the race.

The sector's road ahead is not without challenges, but experts remain optimistic about its medium—to long-term prospects. While the US has entered a rate-cut cycle, they emphasise that greater policy clarity is expected after the US elections 2024—an outcome likely to bode well for the sector.

The US presidential election is significant for the global economy and markets. The policies and strategic decisions of the world's most powerful and largest economy are bound to have an effect on global trade.

The US election holds particular significance for the Indian IT sector, given that the US is a crucial market for Indian IT service providers. Policies on H-1B visas and potential tax hikes on companies that outsource work are among the key factors that could shape the sector's future prospects.

Mint talked to five industry experts to gather their insights on the outlook for the IT sector in Samvat 2081 and the potential impact of the upcoming US elections on the industry. Here's what they said:

Deepak Jasani, Head of Retail Research, HDFC Securities

IT companies delivered decent numbers in Q2FY25, and their commentary suggests a gradual recovery in H2FY25.

Investors are assessing the potential effects on the IT sector of the US Presidential Election 2024, which will take place next week.

Indian IT companies largely depend on the US economy and corporates and generate more than half of their revenues from the US.

Stringent work visa policies, anti-immigration policies, employment and hiring policies and guidelines related to using subcontractors, and establishing additional near-shore delivery centres could impact the stock prices of Indian IT companies.

“In the last Trump rule, Indian IT companies were at the receiving end and suffered. The fear of the current time is also similar, though there is a chance that Trump may not follow his earlier policies in their entirety,” said Jasani.

Sandeep Gogia, Managing Director- Investment Banking, Equirus

It has been a mixed bag, with Infosys, HCL Tech, and LTIMindtree leading the pack while TCS and Wipro lag in terms of sales growth in constant currency quarter-on-quarter.

Overall, one common voice is emerging that green shoots on discretionary spending are emerging, especially in BFSI in the US, and some companies are also indicating some revival in tech segment spending.

There are also early signs of recovery in small-size deal pipelines (which typically tend to be discretionary in nature).

Otherwise, management commentary remains cautious, given geopolitical issues and impending elections in the USA.

The Street is expecting a recovery in growth in FY26E versus FY25E, which can’t be ruled out as the rate-cut cycle in the US and Europe has already started.

This can trigger discretionary spending beyond BFSI in sectors that are rate-sensitive unless the US sees a deep recession versus the street expectation of a soft landing.

Generally, election season in the USA keeps investors cautious, given the experience of rhetoric for global sourcing from the USA during election time.

Kunal Shah, Senior Research Analyst, Carnelian Asset Management & Advisors

The IT sector is one of the best-placed sectors to play the interest rate cut cycle in the US. BFSI demand has already seen an uptick, and other sectors should gradually follow up.

“After many quarters, we also see a headcount increase—all these augur well for the sector's companies,” said Shah.

“Companies in the sector have had a good run-up in the past few months, and there could be some consolidation. Also, margins will be under pressure in the coming quarter, considering a wage hike will follow. However, from a two to three-year perspective, the sector looks poised to do well,” Shah said.

Saurabh Patwa, Head of Research and Portfolio Manager, Quest Investment Advisors

The IT sector results so far have been broadly in line with expectations. In the US, the BFSI sector shows signs of recovery, with an uptick in volumes and a gradual improvement in discretionary spending.

However, in Europe, particularly in the automotive and manufacturing segments, headwinds persist, weighing on the performance of some players.

Companies are managing the challenging macroeconomic environment, with demand stabilising in key verticals. There are positive signals suggesting a stronger recovery in the IT sector in the coming quarters.

The recovery in financial services and broad-based growth expected in Q2FY25 should lead to improved performance in the second half of FY25 and beyond.

The strong results of large US banks are encouraging, indicating a potential flow-through effect that could benefit Indian IT services as we move ahead.

While the sector could face margin pressures due to seasonal factors like furloughs, wage hikes, and the falling interest rate cycle, it is likely to increase discretionary spending, boosting IT demand.

“Historically, US elections have had little to no impact on the IT spending patterns of US corporations, so the election cycle is not expected to alter the sector's trajectory significantly. Overall, the outlook remains cautiously optimistic for Indian IT, driven by sectoral recovery and steady demand,” said Patwa.

Sagar Shetty, Research Analyst, StoxBox

The IT sector looks promising as we enter the new Samvat, particularly with the optimistic demand outlook fueled by rate cuts.

The US election's conclusion will likely clarify the policy direction, bolster investor confidence and stabilise the market.

Potential policy changes post-election could likely attract new opportunities for companies, including favourable trade agreements and regulatory changes.

Such a positive outlook driven by investor confidence and improved investment will further garner positive sentiment in the sector. As the calendar year-end approaches, we expect an improved deal execution pace as the demand stabilises.

“We believe that Tier-1 companies will likely be the main benefactors of this demand upheaval owing to the comprehensive product offering they can provide,” said Shetty.

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