Hits and misses for IT industry in 2017

The outlook for the information technology sector looks better in 2017 after a forgettable 2016 which saw growth slowing down and stocks getting battered.

HSBC said in a note a better macro-economic environment in the US would boost growth for banks, the benefit of which will flow through to Indian IT firms by way of higher technology spending by these banks. Reasonable valuations are an additional positive.
However, the picture is not very rosy either, as immigration reforms in the US and volatile macro-environment in Europe-another key geography for the IT industry-will counter these upside risks, said HSBC which is 'neutral' on the sector in its strategy portfolio.
"While a US macro and growth pick-up would undoubtedly be a driver for IT stocks, immigration reforms/newsflow may keep sentiment subdued for Indian IT stocks," it said.
HSBC has cut target price on Wipro by 5% to Rs 442 and retained 'reduce'. On Infosys, Tata Consultancy Services and HCL Technologies, HSBC maintained 'hold'. Tech Mahindra, on which it has a 'buy' rating, HSBC has raised target price by 3% to Rs 525.
Disruption from automation and technology-fuelled transformation has been hurting the sector besides the Brexit referendum-related uncertainty. Donald Trump's rhetoric on protectionism and anti-immigration has been another source of worry. On November 8, the Republican candidate scripted a surprise victory in the US Presidential election.

Owing to these factors, BSE IT index fell 8% in 2016, underperforming the Sensex which rose 2%. The big five IT companies' shares fell 3-15% in 2016.
HSBC said it is tough to ascertain Trump administration's intent, some of the much discussed provisions such as increase in minimum wages for visa holders and clause that IT firms cannot have more than 50% of US employees on visas, may be introduced. These restrictions could have a revenue impact of 80-240 basis points over a two to three-year period, it said.
In Europe, uncertainty on trade policies post the UK referendum remains a key risk for the business environment and IT spending in the near term, added HSBC.

 

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