Indian IT majors are likely to register mid-to high-single digit growth over the next few quarters, indicating a slower-than-expected recovery even after Donald Trump’s re-election as the US President raised hopes of a corporate tax rate cut and the resultant increase in corporations’ discretionary spending and IT budget, brokerage firm CLSA has said.
The sector, investment analyst Sumeet Jain said, also continued to face structural challenges such as budgets shifting to software from information technology (IT) services, the emergence of global capability centres (GCCs), and the increasing market share of the India arms of global IT companies such as Accenture and Capgemini, prompting the brokerage to adopt a cautiously optimistic outlook.
The firm projected a growth rate between 6% and 8% for IT majors such as Tata Consultancy Services, Infosys and Wipro, in divergence with brokers on the Street who predict a double-digit growth.
“If you look at Trump 1.0, the corporate tax cuts led to significantly increased discretionary spending. Now, this time around, the tax cuts will not be as critical. Last time it went from 35% to 21% but this time it will be from 21% to 15%, most likely. So don’t expect the kind of ‘bazooka experience’ that we had back in 2017-18 (Trump’s first term as president),” Jain added.
The US is the largest market for India’s $254-billion IT sector, whose overall contribution to the American GDP is $80 billion, according to industry body Nasscom. The sector saw a market rally on the news of Trump’s election on the notion that tax rate cuts would result in higher discretionary spends, which in turn will lead to expanded IT budgets for these companies.
While IT firms have seen recovery over FY24 in the first half of the current fiscal, the outlook for the rest of the year remains muted given Q3 has fewer working days for North American and European clients and higher furloughs.
In addition to challenges on the client budget side, IT firms are seeing some structural shifts, Jain said, which do not bode well for a quicker recovery.
“We clearly see after the advent of cloud and smart social mobility analytics, the incremental spend into software side within the overall tech budget has been much higher than what it has been to IT services,” he said, adding that this trend will continue in light of AI adoption.
Further, the penetration of IT exports from India in relation to the global IT markets has started to plateau, even as the share of the top 6 IT firms – TCS, Wipro, Infosys, TechM, HCLTech, and LTIMindtree ( as defined by CLSA) — to overall Indian IT exports has come down to 41% in FY24 from 47% in FY12. On the other hand, Jain said, the Indian arm of global IT firms such as Accenture and Capgemini have started doing more and better in the country, raising competition.
Lastly, Jain said, the threat posed by GCCs cannot be ignored since they have evolved from back-offices to focussed research and development centres for many companies. GCCs are outpacing IT firms on both revenue and human resource acquisition fronts, albeit on a lower base.
