Even as the Dow and Nasdaq scale new peaks, Indian IT cos still guarded on US economy

India’s leading IT services companies, TCS, Infosys, and Wipro, are treading cautiously on demand from the US, despite rising optimism about the US driving stock markets there to all time highs.

The management teams of these IT giants remain guarded in their portrayal of the situation and demand in their largest market, emphasizing the need for continued vigilance and adaptability in the face of potential headwinds.

The US economy has shown signs of resilience in recent months, with GDP growth picking up, unemployment rates falling, and stock markets reaching new highs. This positive momentum has been fueled by a combination of factors, such as strong employment data and a decline in inflation.

However, despite these encouraging developments, Indian IT firms are not letting their guard down. The management teams of these companies remain cautious in their outlook, highlighting the lingering uncertainties and potential risks that could derail the recovery.

Infosys CEO Salil Parekh, the Q4 earnings call, acknowledged the improving macroeconomic situation in the US but maintained a measured tone.

“We see the discretionary spending and digital transformation work at the same level. We see focus on cost efficiency and consolidation continuing.” This statement underscores the current priorities of clients, who are emphasizing cost optimization over new investments in the face of economic uncertainty.

Wipro’s new CEO, Srinivas Pallia, also expressed caution in his outlook for the near term. The company’s muted guidance for Q1 FY25, projecting a sequential growth range of -1.5% to +0.5% in constant currency terms, is a clear indication of the challenges it anticipates. Pallia acknowledged the uncertain environment, saying, “The economic environment is still uncertain and there might be more challenges in the short-term.”

Even TCS, which reported strong deal wins in Q4 FY24 with a record total contract value (TCV) of $13.2 billion, is not immune to the growth concerns. Despite the impressive deal pipeline, there are doubts about the company’s ability to convert these bookings into actual revenue growth. CFO Samir Seksaria hinted at the unpredictability factor, stating, “We have never given guidance. Two, as I told, whatever answer I gave to Kawaljeet, like, there is an amount of unpredictability in terms of our customers’ readiness to cut the discretionary work that they are doing based on the return on investment they’re seeing.”

The cautious stance of Indian IT firms is not just a reflection of the uncertain macroeconomic environment but also a recognition of the structural shifts that are underway in the industry. The pandemic has accelerated the adoption of digital technologies and has forced companies to rethink their business models and operations.

This has created both opportunities and challenges for Indian IT firms. On one hand, there is a growing demand for digital transformation services, cloud migration, and cybersecurity solutions. On the other hand, there is also increased competition from global players and niche providers, as well as pressure on pricing and margins.

In this context, Indian IT firms are focusing on building their capabilities in emerging technologies such as artificial intelligence, machine learning, and cloud computing. They are also investing in reskilling and upskilling their workforce to meet the changing needs of clients.

However, even as they invest in these areas, Indian IT firms remain cautious about the near-term outlook. They recognize that the recovery in client demand is likely to be gradual and uneven, and that they may face headwinds from factors such as geopolitical tensions, regulatory challenges, and currency fluctuations.

TCS CEO K Krithivasan emphasized the dual challenges faced by clients, stating, “Clients want to do transformative work, and they want to embrace new technology. We talked about cloud adoption, enterprise cloud modernization and also about Gen AI. Clients want to do all of them, and clients also want to conserve costs. These two are the drivers that make them choose the appropriate projects.”

The cautious optimism of Indian IT firms is also shaped by their experience of previous economic downturns and market disruptions. They have weathered major shocks in the past and have emerged stronger and more resilient each time.

However, they also recognize that the current crisis is different in many ways, and that they may need to adapt their strategies and business models to meet the changing needs of clients and the evolving market landscape.

In conclusion, while the US economy and stock markets have shown signs of recovery in recent months, Indian IT firms remain cautious in their outlook and commentary. They recognize that the recovery is still fragile and uneven, and that there are significant uncertainties and potential headwinds ahead.

As such, they are focusing on maintaining resilience, driving operational efficiency, and investing in their capabilities and people to meet the evolving needs of clients. They are also emphasizing the need for continued vigilance and adaptability in the face of a rapidly changing market landscape.

The cautious stance of Indian IT firms reflects their recognition of the structural shifts that are underway in the industry. They know that the road to recovery is not going to be smooth or straightforward, and that they will need to navigate a range of challenges and uncertainties along the way.

However, they also remain confident in their ability to weather the storm and emerge stronger on the other side. The cautious optimism of Indian IT firms in the face of an uncertain macroeconomic environment and a recovering US economy is a testament to their resilience, adaptability, and long-term vision. As they continue to navigate the challenges and opportunities ahead, they will undoubtedly play a crucial role in shaping the future of the global IT industry.