Domestic IT shares are gradually emerging as a preferred bet for several market experts, at a time when the wider market has not been able to shrug off the overhang of disappointing earnings as well as a spate of selling driven by foreign investors.
After the US election verdict, there has chatter around IT sector's improved prospects, with hopes of higher deal value from US-based clients. The US manufacturing and BFS sector is expected to benefit from a likely extension to the corporate tax cut, due to lapse in 2025.
Read More: Under Trump 2.0, possible corporate tax cuts could boost IT demand
A positive earnings cycle will likely drive higher spending for IT services in US, and hence Indian tech companies stand to benefit from an anticipated pro-business climate in America, say experts. In this context, Indian IT companies fit into the 'Trump Trade' narrative, market expert Sunil Subramaniam said.
“IT still remains my number one Trump Trade pick,” Subramaniam said, highlighting that currency dynamics and US sectoral growth intertwine to favour IT companies. The strength in US dollar against Rupee also enhances the profitability of Indian IT firms, given that a significant portion of their revenue comes from exports.
One major concern for investors is tighter immigration policies under President-elect Trump’s administration, particularly regarding H-1B visas. Here, Subramaniam argues that the issue has been over-hyped. H-1B visas primarily affect onshore work, which constitutes only a fraction of IT operations, he said. With alternative models like near-shoring (using Canada or Mexico as base) and offshoring (from India), IT companies have mitigated this risk effectively in the past. According to Subramaniam, the broader outsourcing model remains intact, as US corporations prioritise cost efficiencies, given that US labour costs are substantially higher.
“An Indian engineer working in the US on an H-1B visa is more expensive than someone working offshore in India. For US corporations focused on profitability, outsourcing will remain essential,” he added.
Subramaniam also points out that the Trump administration’s policies primarily target illegal immigration rather than high-skilled workers on H-1B visas. “Illegal immigration affects the low-end workforce, not the high-end IT jobs sought after by corporations,” he said.
IT Stocks: The Road Ahead
Given the growth in US manufacturing, banking, and the resilience of outsourcing models, IT companies are well-positioned to capitalise on emerging opportunities. While minor disruptions due to immigration policies cannot be ruled out, Subramaniam added that their actual impact on the business fundamentals of IT companies is far less significant than perceived.
With structural and cyclical tailwinds in their favour, many believe Indian IT companies remain a compelling choice for those looking to capitalise on the Trump trade.
Midcap vs Largecap IT
Kunal Shah of Carnelian Capital has a nuanced view of valuations across the IT space. While acknowledging that certain pockets of midcap IT has stretched valuations, he adds that both large and select midcap IT firms still offer reasonable opportunities. “Large-cap IT should continue to perform well, benefiting from BFSI spending and US interest rate trajectory,” Kunal Shah said.
He also sees midcap opportunities, particularly in engineering research and development (ER&D) and product companies, where growth potential aligns with fair valuations. Additionally, he emphasises the potential of midcap firms undergoing CEO transitions, which could unlock substantial value if the new leadership delivers on performance. This mix of stability in large caps and selective opportunities in midcaps makes IT an attractive play.
Also, given Rupee's propensity to depreciate from here on, Manish Sonthalia, CIO, Emkay Investment Managers is also betting on the export-oriented sectors such as IT, CDMOs and Pharma.
Disclaimer: The views and investment tips expressed by experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
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