Understanding the Indian IT Sector: Key Insights for the Next 6 Months
Reading this full report will give you all you need to know about the future of the Indian IT sector and stocks to invest.
Interest Rate Concerns
High interest rates in the US and the likelihood of only minor rate cuts in 2024 add to the sector's worries. Some economists even think the Fed might raise rates further, which could keep enterprises from increasing their spending.
Impact of US Elections
The upcoming US presidential election in November 2024 is another source of uncertainty. The economic policies of the candidates could affect the sector, especially with proposed changes in tariffs, immigration, and energy plans. These changes might impact inflation and overall business conditions.
Current Performance and Revenue Growth
The Indian IT sector wrapped up FY24 on a weak note. Tier-1 companies showed below mid-single-digit growth, with a median revenue decline of 0.6% QoQ. In contrast, Tier-2 companies capped at high-single digits, showing a 2.1% QoQ growth. Key verticals like BFSI displayed slight positive growth (+1.9% QoQ), while Retail struggled (-2.3% QoQ).
Operating Margins and Deal Conversions
Operating margins remained flat at 19.7%, despite a strong deal TCV of $27 billion (+33% QoQ). However, converting these deals into revenue remains a significant challenge for the sector.
Challenges and Risk to Earnings
The sector is facing low demand due to an economic slowdown and higher interest rates in the US. This situation might worsen due to uncertainties around US economic policies after the presidential elections. There could be a downside risk to earnings for FY25 and FY26, with revenue growth predictions for major companies like Infosys (NS:INFY) and HCL Tech (NS:HCLT) potentially being too optimistic.
FY25 Outlook
Companies are conservative, expecting slower growth due to execution delays and macroeconomic uncertainties. Despite this cautious outlook, a spending recovery could improve these estimates.
Restrained Spending
Many enterprise clients continue to limit discretionary spending, despite impressive US GDP growth in 2023. The demand outlook for the first half of 2024 remains cautious, with some expecting a pick-up only in the latter half of the year.
My Stock Picks
As of today, my stock picks are Infosys at 1220, Tech Mahindra (NS:TEML) at 1075, Wipro (NS:WIPR) at 420, Happiest Mind at 810, and the best of all are LTI Mindtree (NS:MINT) and Mphasis (NS:MBFL) at 4455 and 1810, respectively.
Summary
While the outlook is cautious, strategic investments and strong fundamentals in select Tier-1 companies offer promising opportunities.
What are your thoughts on its prospects? Share your insights below!