The latest labour data from the US showed rising unemployment, while the inflation rate remained above the Fed's targeted rate, increasing concerns that the world's largest economy may be vulnerable to a recession. Amid this many economists are expecting a rate cut by the Federal Reserve.
These data have raised concerns among Indian IT companies, many of whom earn the majority of their revenue from clients in the US. How do these changes in the US economy affect Indian IT firms? NDTV Profit Research takes a look.
Effects Of US Rate Cut on Indian IT Firms
The US Federal Reserve has been hiking the interest rate before maintaining it over the past couple of quarters in a bid to reduce the gap between the targeted inflation of 2% and the current inflation of 3% as of June 2024. Many economists are now expecting the Fed to cut rates in September.
If done, this would boost spending because a low interest rate makes borrowing more affordable.
Many of India's top IT companies have stated in their earnings that their clients are restrictive on their budgets for IT spending because of the macro-economic uncertainties. Now that all six of the top IT companies, from Tata Consultancy Services Ltd. to Infosys Ltd., HCL Technologies Ltd., Wirpo Ltd., and LTIMindtree Ltd., earn the majority of their revenues from the US, a rate cut would likely release the budget constraint, causing spending on IT to improve.
Looking at the prior instances of rate cuts, when the Fed cut the rate in September 2007, the Nifty IT returned 9% in the period of two years between September 19, 2007 and September 22, 2009. While the Fed cut rates in August 2019, the Nifty IT returned a whopping 100% in the two-year period between August 1, 2019 and August 2, 2021.
Prior instances of 2007 and 2019 saw the growth of Indian IT compress at the start of the rate cut cycle, but the difference this time is that the growth in the sector is already low due to underinvesting in the past two years, Bank of America said in a note.
Also Read: RBI MPC Meeting 2024: Pre-Mature To Talk About US Recession, RBI Governor Shaktikanta Das
Deals: Vendor Consolidation Or Transformation
All six IT companies mentioned getting vendor consolidation deals and cost optimisation deals in their first-quarter earnings commentary. However, the room for transformational deals seems to vary across these companies.
"There is still not much appetite to spend big on a transformation, a technology transformation type of program," said Salil Parekh, chief executive officer of Infosys, in an investor conference call. However, TCS, Wipro, and LTIMindtree did mention clients looking forward to spending on transformational deals. This means that clients of Wipro and TCS are able to accommodate additional IT spending into their budget, which can ultimately flow into revenue for these IT companies.
"We are able to win some of the transformation deals specifically in SAP, and we are seeing good traction there," said Srini Pallia, chief executive officer of Wipro, during the first-quarter investor conference call.
Similarly, Debashis Chatterjee, chief executive officer of LTIMindtree, said, "We are seeing early signs that they are beginning to deploy the savings in additional budgets towards kicking off high-priority transformation programs."
The Bank of America, in the said note, believes that the worst of the spending reductions is behind, but macro data points are clouding the view on re-acceleration. The broking house believes that vendor consolidation would be a better theme than the IT sector revival and hence would prefer large-cap names like TCS, Infosys, and HCL over Wipro and Tech Mahindra.
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