Uncertain Dollar And AI Make The Indian IT Growth Sluggish

The uncertainty surrounding AI and the dollar is causing sluggish growth in Indian IT. Sunita Krishnan

In a recent analysis, Sunita Krishnan delves into the intricacies of the IT sector, offering her insights on the anticipated modest growth for FY26. She highlights key influences, including the dynamics of dollar fluctuations, the ongoing adjustments in artificial intelligence, and the implications of fiscal tightening in the United States. In a recent discussion, She sheds light on the potential ramifications of tariffs and the spectre of a looming recession for Indian IT companies. She expresses a sense of cautious optimism, looking ahead to what could be a stronger year in FY27.

It’s fascinating to see how AI has woven itself into nearly every project that these companies are presenting to their clients today. However, when considering it independently, there isn’t much of significance to discuss. When considering the aspect of tepid growth, it’s essential to take a step back and examine the broader picture from a more normative viewpoint.

Let’s dive into the world of IT. In the ever-evolving landscape of IT, experts suggest that the favourable dollar dynamics that once bolstered margins are now a thing of the past. As we look ahead, the adjustments related to AI are still unfolding, leading many to predict that growth will continue to be modest for FY26 and beyond. Do you think that’s a fair assumption for the IT sector?

Sunita Krishnan: Absolutely, I would agree with that sentiment. When it comes to growth, I find myself in alignment with the cautious observations you’ve mentioned. Let’s dive into this topic step by step. In recent discussions, the Indian Rupee has seen a notable depreciation against the dollar. Experts suggest that this shift could potentially enhance profit margins for various sectors. Reflecting on my journey through the sector, it’s fascinating to recall that when I first began my observations, the INR-dollar exchange rate was around 42, and Infosys boasted impressive EBIT margins nearing 35%. Currently, the exchange rate stands at approximately 87 INR to the dollar, while we proudly maintain EBIT margins of 21%.

Interestingly, the depreciation of the INR against the dollar doesn’t necessarily translate into automatic margin expansion. One key point I’d like to highlight is that much of this is essentially a return to our customers.

It’s clear that costs have been on the rise, while pricing has yet to show any signs of improvement.

It’s fascinating to see how much AI has woven itself into nearly every project these companies are rolling out for their clients today. However, when considering it independently, I believe there isn’t much of significance to discuss. When considering the aspect of tepid growth, I find it valuable to take a step back and examine the broader picture from a more normative standpoint.

In the latter half of 2024, the Nifty IT sector showcased an impressive performance, outpacing the Nifty by a remarkable 22 percentage points. This achievement is particularly noteworthy considering that earnings projections for FY25 and FY26 remained largely unchanged throughout that six-month period.

Looking ahead, I anticipate that FY26 will emerge as a remarkable year of growth. As we delve into the projections for FY24 and FY25, it’s evident that the industry experienced a modest growth of 2%. Looking ahead, estimates suggest a potential increase of around 4-4.5% for FY25. Initially, there was a consensus anticipating a more robust growth trajectory, aiming for 7% to 8% in FY26. However, given the current developments in the US and the implications of tariffs, it seems likely that FY26 may not surpass the performance of FY25.

This year is poised to mirror last year’s growth trajectory, offering a familiar landscape for progress. As we look ahead, the anticipation builds around whether this year will see a decline or if growth will falter compared to FY25. The outcome hinges on two pivotal factors that lie before us: the ongoing reciprocal tariff situation and the significant issue of fiscal tightening in the United States.

Currently, there’s a vibrant discussion unfolding regarding the future of the US economy, particularly in light of the implications of tariffs. It’s intriguing to note that the term “recession” is making its way into various broking reports, not just locally but on a global scale as well. Given the current landscape, what implications does this hold for Indian IT companies? Can you elaborate on the potential trajectory for these companies moving forward? Considering that the valuations for many IT firms are significantly elevated compared to the last recession, what are your thoughts on their performance in the near future?

Sunita Krishnan: When examining valuations, it’s noteworthy that Nifty IT truly shone, outperforming Nifty by an impressive 22 percentage points in the latter half of 2024. As we reflect on the year-to-date performance, it’s clear that it has lagged behind the Nifty by approximately 12 percentage points. This trend seems to be influenced by various factors, suggesting that we may be heading towards a period of slower growth.

It’s interesting to note that when it comes to the topic of recession, I prefer to steer clear of that conversation. At this moment, I feel that my projections, which are generally below the consensus, are based on the assumption that growth in FY26 will mirror that of FY25. However, it seems they do not take into account the potential impact of a recession. The anticipated growth in real GDP is expected to proceed at a more measured pace.

Last year, the US showcased an impressive growth rate of 2.8%, setting the stage for what’s to come in 2024.

Is there a possibility of an additional correction on the horizon?