Analysts said the run-up in share prices was driven by expectations that Trump would implement pro-business policies that could boost IT spending. But the sector also faces the risk of protectionism in the US that could pose hurdles for many of these software exporters, which could keep the optimism under check.
On Wednesday, the Nifty IT index was up 4% at close, its highest single-day gain since early July 12.
Persistent Systems was up 5.9%, emerging as the top gainer on the IT index. LTI Mindtree, L&T Technology Services, TCS and Coforge were up 4-5%.
“We may see some sentimental impact on IT services as companies might have increased investment post some savings in potential tax decreases,” said Vaibhav Sanghavi, CEO of ASK Hedge Solutions.
Trump wants to reduce the corporate tax rate to 15% for US manufacturers from the existing 21%. He had cut it from 35% during his previous term which ended in 2021.”With Donald Trump now set to come back to the US, he is expected to roll out more business-oriented policies, and scale down the global geopolitical tensions,” said Sumit Pokharna, vice president at Kotak Securities. “This might bring more stability to the European continent and with expectations of tax cuts in the US, both client-centric markets for the Indian IT sector, it will be a big positive for us.”Pokharna said discretionary spending might improve, which was a missing link during the Biden administration.
At the same time, some analysts are warning that the increase in protectionism in the US could make it tougher for overseas companies.
The Nifty IT index has remained resilient despite a sell-off in the broader markets in the past month. It has advanced 0.3% in the past month, whereas the benchmark Nifty has fallen 2.1% in this period.
Persistent Systems, Coforge and Wipro have risen by 5.7-11.2% in this period. Traders are betting on interest rate cuts to push the IT stocks higher for now.
“In case of a rate cut, there will be additional spending expected in the BFSI (Banking, Financial Services, and Insurance) sector in the US, which is the largest contributor to India’s IT revenues,” said Paras Bothra, chief investment officer at Ashika Alternative Investments.
Analysts said with Trump’s re-election, obtaining H1-B visas would pose challenges for IT companies.
“Getting H1B visas might pose a challenge which can be mitigated by larger deal size, higher value of deals, AI-based deals, higher charges and more,” said Pokharna.
He prefers Infosys and TCS in the large-cap space and Coforge and LTI Mindtree among midcap IT companies.
Bothra said the third quarter is usually a furlough quarter globally due to the winter, but from a longer-term view, things look incrementally positive for the sector.
“Investors can go for selective buying in the sector, focusing on companies that have given a good outlook in their guidance, and those who earn most from the BFSI sector,” he said.
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