Fundamentals of Indian IT firms remain strong despite macro environment

The global markets are in turmoil. On Monday, routs could be seen across markets in the US, Japan, South Korea and India, among others. Apart from geopolitical factors, including conflict-like situation arising between Israel and Iran, the unwinding of carry trade in Japanese Yen led to such nervous reaction. Moreover, weak job data in the US along with increased unemployment claims have raised fears about a likely recession in the world’s biggest economy. This has spooked the market to a large extent. That apart, earnings of global technology giants have largely disappointed the market. Despite all the talk and announcements on AI & GenAI, revenue translation is not happening at the projected fast pace.

As investors have already taken exposure to tech giants in the hopes of earnings upgrade, this seems to be happening rather slowly. No wonder, the earnings shortfall of many companies has prompted investors to exit their positions. In the last one month, the tech-heavy Nasdaq plunged close to 12 per cent. Against this backdrop, quite significantly, shares of Indian IT firms have shown resilience. After the Q1 earnings, most analysts have pointed out that the downfall in revenue growth has bottomed out.

Managements of top firms indicated that the most critical BFSI (banking, financial services and insurance) was showing signs of revival in the US market. Such commentary has raised hope of a likely recovery in the second half of this financial year. Stocks of most IT firms reacted to it with rising buying interest. Despite fall of Nasdaq for two weeks, Nifty IT Index has shown resilience. However, things changed dramatically on Black Monday when IT stocks were beaten badly in line with the larger market. The question that is worrying everyone is what changed in the last two weeks that investors are not optimistic about Indian IT firms’ growth? The answer is that nothing has materially changed except sentiments. Indian IT firms by nature are very different from global technology giants, which are mostly product companies. Indian IT industry relies on the services part of the technology business. So, any slowdown in the US and other geographies usually helps domestic IT firms as more cost savings measures are deployed by enterprises.

Moreover, most Indian IT services firms have now cut the flab and are operationally sound, particularly after reducing their headcount. Their cost structures are far better than what it was two years back. While global events will definitely impact the demand environment for the outsourcing industry, Indian firms appear to be in a better position to navigate the complex environment. Markets are not rational and mostly move on sentiments. While Monday’s global rout is a reminder of the fickleness of public markets, there is no denying the fact that investors reward companies with strong fundamentals. Therefore, it is better for Indian IT companies to focus on the operational part of the business than on stock movement. Similarly, investors will be better off looking at the fundamentals than blindly following the herd.