Growth momentum pickup in midcaps much stronger: Ankur Rudra, JP Morgan

Ankur Rudra of JPMorgan says on a broad-based basis, we do not have the visibility that industry growth is going to double digits yet and hence, as we go towards the end of FY25, we may not have the momentum we need for FY26 to be a double-digit growth year. More specific sectors are doing well. Some sub-segments like financial services, maybe parts of high-tech are doing well. Some of the midcaps are doing well but broad-based recovery is still elusive. If there is any kind of macro impact, that is the main sort of headwind to watch out for.

A lot of questions are being raised about whether Indian IT services can catch up with the AI boom or whether services providers will manage to beat the product manufacturers dominant in the US? What is your view?
Ankur Rudra: On the AI side of the equation, it is useful to take a step back and remember that tech services companies effectively tend to implement a lot of the new technology that comes by. At the moment, it is AI, before this was cloud. So, to implement AI at an enterprise level, most large enterprises will need IT services companies to help them with doing that to integrate IT and AI into their processes. I think there will be a role for them.

We just feel at the moment it is very early for enterprise AI adoption to take hold of. What most enterprises are realising is that to complete the AI journey, they have to complete the cloud journey, and that has not yet been completed. Cloud journeys got a boost during COVID. They were left incomplete and we are probably seeing the early signs of that. The nature of work at the moment is still completing that to be able to enable a lot more AI adoption overall. So, IT services companies will definitely have a play on this side of the fence too.


What is your outlook on the impact of the US presidential election? What could Trump winning the US elections potentially mean for the IT sector in terms of the tax cut benefits as well and overall sentiment?
Ankur Rudra: The US presidential election always has an important role to play. At the beginning, typically when this election is on the horizon, we sometimes see a slowdown in decision-making, so irrespective of the results a decision in itself is helpful to act as a clearing event because decision-making can restart and that can help the sector.

From a specific policy perspective, there are two or three things to consider. You highlighted tax cuts, that is something that can be a positive, especially if the sunsets of the previous tax cut under the jobs and tax cuts act can be extended or if the tax cuts can become deeper, that can be helpful for the sector, especially because last time we did see enterprise spend pick up as a result of that.

But the other angle to that is also if there is any kind of tariff action either unilaterally across the world or specifically against services, can be somewhat negative. It can also be inflationary. So, one of the negatives potentially is that if you have an inflationary policy outcome, interest rate cuts, which are going on, might take a pause and that can be negative for some of the financial services players in the US and hence tech spending by them.

The third part, of course, is immigration. Historically, we have seen immigration being a bit more aggressive during the previous Trump administration and that is something to consider. This time, maybe the IT services companies are slightly better prepared because there is a lot more localisation vis-a-vis earlier. So, there are key potential positives if there are tax cuts. Also, if there is any kind of deregulation in the financial services industry or the TMT industry, which can be helpful from a tech spending perspective, the negatives are anything around tariffs, anything around immigration.

The other thing I also wanted to understand a little bit in greater detail is whether or not there you foresee any visa restrictions and whether that is going to have a significant impact then on Indian IT, especially with a dominant US presence.
Ankur Rudra: Yes, like what we saw during the previous Trump administration, there is an issue around visa or access to work visas. The industry uses a lot of non-immigrant visas like the H-1B visas or the L-1 visas. But it has to be remembered at the outset that the dependence on visas has reduced. About eight years ago, the industry was a bit more dependent on visas, but a lot more companies now are better prepared. They generally have a higher proportion of locals or green card holders and visa dependence is a lot lower and hence, the potential risk of change in access to visas is a lesser of a risk.

Having said that, there are two or three main ways, immigration reform or any kind of access to visas can be impacted, either in terms of policymaking or rulemaking or legislative. We have not seen legislative action, which is potentially the most negative one. We have only seen policymaking action. That might make it tougher to get visas. But like I said, the industry is better prepared. This could be something that we will be watching very closely.

The other thing I also wanted to understand was what is it that you are sensing already in terms of hiring or attrition trends right now within Indian IT because one would assume that Trump perhaps would imply a stronger economy and that would entail perhaps higher IT spends as well. Is it really that simple and would that reflect or already is in hiring trends?
Ankur Rudra: It is an important point. What we have seen is to start with on the demand side, there are early signs of technology spending recovery, at least in sectors such as financial services or from the financial services side, for example, we did see over the course of the last three quarters companies report better numbers. We have also seen technology enterprise spending by the biggest US G-SIBs, as an example, begin to pick up, so I think that is a positive sign. We are seeing and hearing of early signs of tech spending within the high-tech sector improving, some hopes of tech spending in the retail sector improving, in addition to relatively healthy levels of spending in the travel sector and some of the consumer sectors.

So, there are early signs that things might improve and this might pick up a bit more. Now, the US economy, which is still one of the strongest large economies in the world, continues to do well and if there is US exceptionalism in terms of earnings growth, it is always positive for IT services outsources given they have a high exposure to that. At the moment, technology spending has been held back despite a strong US economy over the last two years because there was overspending in the past. The main hope is that we have been through that cycle, we have already had two-and-a-half years of digesting COVID-led overspending, especially in the financial services and the high-tech sector and if that sort of comes back, we will see much stronger technology spend pick up from here on.

And I just wanted to dig a little bit deeper talking about the outlook in terms of earnings. You have flagged off a number of factors, but what do you think would be some of the challenges when it comes to the earnings trends?
Ankur Rudra: So, we are going into the second half of the year. Typically, in the second half, there is an element of slowdown. Seasonally, we have furloughs, for example, in this quarter. A number of companies have flagged off furloughs. Hopefully, it will be in line with previous years as opposed to higher than expected, I think that is one area of softness. The second area of softness is there tends to be potentially slower decision-making just before an election result comes out, so the deal signings could be a bit softer. We had seen an element of softer deal signings the previous quarter, there is a small risk that continues to an extent for the industry.

Thirdly, we have not really seen every industry pick up yet. So, on a broad-based basis, we do not have the visibility that industry growth necessarily goes to double digits yet and hence, as we go towards the end of FY25, we may not have the momentum we need for FY26 to be a double-digit growth year. So, what we are seeing is a lot more specific sectors are doing well. We are seeing sub-segments like financial services, maybe parts of high-tech doing well. Some of the midcaps are doing well but broad-based recovery is still elusive. If there is any kind of macro impact, that is the main sort of headwind to watch out for.

So, what is the verdict then post the earnings? What is the pecking order within IT looking like? Who is going to win the race and who is going to fall behind?
Ankur Rudra: So, we cannot talk about specific names, but from a sub-sector perspective, I think what really stands out quite clearly is the midcap companies are doing a lot better. While there have been beats across the board, there have been some beats across larger firms too, but the growth momentum pickup in the midcaps has been stronger.

We definitely hear them sound a lot more confident about the medium to longer term in terms of growth picking up and some of this is partly because midcaps have higher concentration of revenues, either in terms of financial services or parts of high tech. So, what we are seeing and hearing is some of the midcaps are growing a lot better. Parts of the ER&D industry have seen an element of slowdown even though they are growing on an average faster than larger firms. We are also seeing the US financial services focused midcaps are really standing out in terms of incremental growth momentum. So, I would say those are the three or four main trends we see.