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IT Budget Rebound in 2024 – Implications for Indian Tech Stocks Explained

Introduction

The article discusses early signs of recovery in IT spending next year as per initial 2024 budget forecasts from enterprises, benefiting Indian IT stocks after a tough 2023.

Analysis for a Layman

This year big companies cut their budgets to buy new IT services and software from Indian IT companies like TCS, Infosys, HCL due to fears of recession in US and Europe which are major markets. But now initial estimates show these IT budgets will rise nicely again by 9% next year in 2024 after barely going up in 2023. This is positive signal for Indian outsourcing companies as demand should improve after falling this entire year when many projects got paused or delayed. If more orders resume next year, Indian IT companies can return to good growth after struggling since clients were hesitant to spend so far in uncertain global economy.

IT Budget Rebound in 2024

Original Analysis

The cautious optimism stems from expectations that the worst demand devastation stemming from record inflation and monetary tightening lies behind even as geopolitics and oil price risks persist. However, the nascent rebound remains concentrated around high-growth digital transformation areas like AI and lags in discretionary IT areas. Legacy incumbents heavily reliant on routine application maintenance contracts seem less buoyant unless adapting solutioning muscles sharply. This flags the bifurcation ahead between “growth” vs “bottom feeders” in Indian IT industry as aggregates conceal the power gap between futurists and dinosaurs. Signs of upticks however should temper existential panic across outsourcing names and enable tactical stock picking.

Impact on Retail Investors

For retail investors, early IT budget thaw signals temporary relief amid battered tech stocks rather than upside surprise yet. Selective accumulation can begin but restraint advisable in overweighting sector with structural concerns that outperformance stays concentrated in niche digital capabilities few current majors demonstrate at scale. Prefer TCS, Mphasis among large caps; LTI, Coforge in midcaps initially. But broader revival calls seem premature when macro uncertainty persists on overseas growth, currencies & costs. Keep accumulating in likely eventual leaders on significant dips only for now.

Impact on Industries

IT/BPM segment observes optimism return albeit fragmented across digital/legacy capabilities. Investment plans may modestly revive especially among progressive new age banking, retail clients. 5G rollout yet to scale but telecom focus widens. ER&D services, internet/platform economies staying resilient too. However, manufacturing, energy and legacy domains recovery remains tepid on macro uncertainty. Local creation of IP assets gets added impetus while M&A upticks forecast as industry matures. But concerns on rising protectionism, talent churn continue challenging outsourcing industries.

Long Term Benefits and Negatives

Sustained mid to high single digit budget growth signals IT still commands mindshare as Enterprise priority for harnessing post-pandemic tech disruption related opportunities. Secular digitization tailwinds persist across banking, retail, healthcare and disruptive 5G rollout commence with IoT possibilities. However, its broader positioning as deflationary force maximizing cheap labor arbitrage at costs of stakeholders risks political backlash. As emerging domains require refined solutioning, pressure to reskill talent persist. Lastly integration complexity magnifies amidst economic uncertainty, necessitating diligent project governance.

Short Term Benefits and Negatives

In near term, IT Companies may selectively restart previously paused projects, accelerating cash flow recoveries. Incremental deal signings, proposal pipelines also observe modest upticks. However discretionary spending around optimizations stays conservative amidst inflation overhangs for clients, in turn capping billing upticks from legacy outsourcing contracts. Currency volatility risks also continue, necessitating forex adaptive pricing models to protect profitability. Moderation in attrition comes as relief, but supply-side cost pressures persist from talent demand-supply mismatches.

Companies That May Gain

  • Tata Consultancy Services
  • Mphasis Ltd
  • Larsen & Toubro Infotech

Companies That May Lose

  • Wipro Ltd
  • Tech Mahindra Ltd
  • Mindtree Limited

Conclusion

In summary, while positive, Indian IT’s growth recovery remains uneven across services portfolios. Investors need prudent stock selection aligning to domains demonstrating visible order resumption and robust budgets.

Citation

Majumdar, Romita. “After a Dry Spell, IT Sights Green Shoots with Higher Budget for ’24.” The Economic Times, 14 Dec.

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