On September 18, 2024, shares of major Indian IT companies, including Tata Consultancy Services (TCS), Infosys, and Wipro, experienced significant declines ahead of a crucial US Federal Reserve meeting. By 2:00 PM, TCS shares fell 3.99% to ₹4,326, while Infosys dropped 3.47% to ₹1,884, and Wipro decreased 3.1% to ₹534.4. The NIFTY IT index fell over 3.5%, with all components trading in the red. This downturn comes amidst speculation surrounding a potential 50 basis point rate cut by the Fed, which could impact the US dollar and further affect IT stocks [70ba466c].
Recessionary fears in the US may delay the demand recovery for Indian IT firms. Despite the US slowdown, Indian IT services firms have experienced slow growth. The uncertainty in the US market and negative sentiment may make enterprises cautious about their tech spending, potentially further delaying the recovery in demand. The recent stock market meltdown, which could be sentiment-driven or fundamental in nature, has also affected the IT sector, with the tech-heavy Nasdaq Composite Index falling by around 12% in the last month. Additionally, the IT index has been an underperformer in 2023, with subdued movement in most IT stocks [3744a035].
However, there is hope that interest rate cuts in the US could support demand in the banking, financial services, and insurance (BFSI) and telecom verticals. The Indian IT sector has historically benefited from rate cuts, with the Nifty IT index returning 9% in the two-year period between September 2007 and September 2009, and a significant 100% in the two-year period between August 2019 and August 2021. If the US Federal Reserve cuts interest rates, it could potentially release budget constraints for Indian IT companies and lead to increased spending on IT projects [23d97605], [3744a035].
In a recent analysis, JM Financial identified Infosys Ltd, Tech Mahindra Ltd, and Wipro Ltd as preferred large-cap IT stocks, while Persistent Systems Ltd and KPIT Technologies Ltd are favored mid-cap picks. Tech Mahindra, with 53% exposure to sectors benefiting from rate cuts, is particularly well-positioned. Historically, Fed rate cuts have coincided with IT services export slowdowns, but JM Financial suggests this cycle may differ due to lower recession probabilities and a normalization phase in IT spending [61ddcb82].
It is worth noting that AI and GenAI-led earnings have not significantly contributed to revenue for tech firms. Despite the potential of these technologies, their impact on the IT sector has been limited. Therefore, the recovery in demand for Indian IT firms may depend more on macroeconomic factors and interest rate cuts rather than emerging technologies [3744a035].
The trajectory of interest cost increases has been gradual, allowing corporates to optimize debt and operations. Lower interest rates could lead to higher stock multiples and discretionary demand, although the immediate impact on corporate spending may be limited. Overall, JM Financial remains optimistic about the IT sector's recovery post-rate cuts [61ddcb82].
In terms of specific recommendations, the Bank of America suggests that vendor consolidation would be a better theme than the overall IT sector revival. They recommend large-cap names like TCS, Infosys, and HCL over Wipro and Tech Mahindra [23d97605].
A weakening US economy may lead investors to look for faster-growing nations like India, which would increase foreign direct investment. Rising unemployment, declining employment growth rate, and manufacturing downturn are key causes of the US recession. India's economy is strong despite world uncertainty and has the potential to attract more foreign direct investment. India's digital revolution and diverse economic foundation contribute to its resilience. India needs to focus on export diversification, domestic demand, and financial stability to reduce risks. India's middle class, digital economy, and public spending support its economic growth. Tredence plans to hire 4,000 employees by 2025. TCS plans to hire about 40,000 employees. India's role in Boeing's global expansion creates job opportunities. Critical software vulnerabilities found in Microsoft, Chrome, and Apple. Wipro teams up with Google Cloud to enhance employee productivity with AI [b4955340].