Demand in the IT sector may be subdued in the short term, but experts say Infosys, TCS and HCL Tech are among the biggest buys

The gloomy demand situation for Indian IT players may continue in the short term, but analysts believe there are green shoots emerging that could fuel the sector’s growth in the medium to long term.

The Indian IT sector may witness continued pent-up demand in the short term, mainly due to conservative technology spending by US-based BFSI clients. However, according to the brokerage firm, there are encouraging signs of recovery, such as recent strong transactions, which are expected to fuel the growth of Indian IT players in the medium to long term. Brokerage in trade in antiques.

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The brokerage firm noted that U.S. banking results suggest there is still a conservative stance on technology spending, with most banks reporting a decline in technology spending as a percentage of revenue.

“Technology spending as a percentage of sales in the first quarter of 2024 was 6.5%, compared to 7.4% in the fourth quarter of 2023 and an average for the last eight quarters of 6.8%. The overall banking business outlook for large banks and consumer sentiment remain strong with lower unemployment and rising home and stock prices. Still, banks remain conservative in investing in technology because they want macroeconomic conditions to improve and global political uncertainty to subside before they invest in the average – and long-term transformation projects,” Antique said.

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Antique stressed that customers are spending carefully, prioritizing investments in services such as data, digital artificial intelligence and cloud technologies. Moreover, they save cash and focus on business-critical projects that provide an immediate return on investment.

However, dealmaking is high as companies experience pent-up demand in the BFSI sector, which is expected to drive growth in the medium to long term, Antique said.

The brokerage firm highlighted that its Indian IT Services Q4 2024 results showed a decline in BFSI revenues.

“All major IT companies recorded below-average performance in the BFSI industry, with Infosys and Wipro reporting over 8 per cent revenue decline. Comments from most companies suggested that the macroeconomic impact of high inflation and peak interest rates in the BFSI sector has led to a cautious approach by large banks,” Antique said.

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Antique prefers large-cap stocks over mid-cap stocks as smaller companies could be more impacted by a further slowdown. In the IT space, HCL Tech, Tech Mahindra and Mphasis are the preferred companies.

Another brokerage company Emkay Global Financial Servicesalso highlighted that FY25 guidance reflects subdued demand, weak discretionary spending and no visibility of demand recovery in the near term.

Emkay noted that management comments from Indian IT players remained unchanged and recovery timelines were uncertain. As a result, the cycle of profit reductions continued, although the overall rate of profit reductions slowed.

The brokerage firm expects that the beginning of the interest rate cut cycle will be a signal for clients to gain confidence in the trajectory of inflation and macroeconomic stability, which could result in a revival in demand and an increase in discretionary spending.

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Emkay expects IT companies’ profit declines to bottom out in the first half of the current financial year (H125) if current expectations of interest rate cuts materialize.

“Share price corrections over the past few months have made valuations more reasonable. On a relative valuation basis, we prefer large-cap stocks over mid-cap stocks. Our order is Infosys, HCL Tech, Wipro, Tech Mahindra, TCS and LTIMindtree in large -caps. Among midcaps, our preference is Cyient, Birlasoft, Zomato, Firstsource Solutions and Mphasis,” Emkay said.

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