Indian IT to remain resilient to tech spend cuts by U.S. firms

India’s information technology sector is likely to remain resilient to a possible decline in tech spending by the U.S. firms in anticipation of a recession in the world’s largest economy, according to Macquarie and HSBC Global Research Ltd.

Indian IT firms will have a limited impact, given their rising focus on digital transformation and strong demand to drive improvement in structural margin, the financial services providers said.

India’s stock benchmarks have rallied 17% since June 17. The IT index, though underperformed the Nifty 50 and Sensex, has gained 13% over the last two months.

Macquarie, in its note dated Aug. 17, said technology spending based on a recession was not an option. It echoed the comments of JPMorgan Chase & Co.’s Chief Executive Officer Jamie Dimon on July 14. The note said tech spending will be more resilient during this probable recession.

Macquarie expects margin contraction to be temporary across India’s tier-I IT firms, and sees attrition levels ease during the second half of FY23. EBIT margin will recover to pre-Covid levels during this time, it said.

Macquarie identified HCL Technologies Ltd., Tata Consultancy Services Ltd., Infosys Ltd., Wipro Ltd. and Tech Mahindra Ltd. as its preferred picks in the sector.

According to HSBC Global Research, the overall macro outlook of the U.S. has not deteriorated much for Indian IT firms to be wary, but there are visible pockets of weakness.

The brokerage said it was not “exuberant” on the sector, but continued to prefer Infosys, HCL Tech, and Larsen & Toubro Infotech Ltd.

The 2022 spending would not change much for the sector, it said, with the companies expected to meet FY23 growth estimates. But there’s a possibility of slowdown in sectoral growth in FY24E.

HSBC expects spending on optimisation of existing cloud landscape to increase compared to the focus on cloud migration and transformation deals over the past three years.

The Indian IT sector is likely to grow at an annualised rate of 3-9% for the next three to four years, HSBC said, with the stocks likely to compound in line with earnings. Bloomberg