With global growth reviving, the prospects of the Indian IT sector remain robust. Both US and European corporates are increasing their IT spends, which they had reduced in the aftermath of the financial crisis. Currently US companies are sitting on record profits. They are also more confident about future demand and want to tap IT for efficiency and productivity gains to benefit from an improving economic outlook.
Technology shifts offer another opportunity area to Indian IT companies. Organisations are spending a considerable portion of their IT spends on making their IT infrastructure more mobile, more cloud-based and more geared towards exploiting big-data.
In Europe, where the outsourcing trend is now catching on, Indian IT companies have begun to gain market share. Faced with the imperative to cut costs, European governments and companies are willing to outsource. They are replacing high-cost vendors with more cost-effective ones.
The major threat to the sector comes from the US Immigration Bill which calls for the substitution of Indian workers with Americans. If passed in its current form, the Bill will translate into higher labour costs for Indian IT. Valuations of most IT stocks are high compared to historical levels. Besides large-caps, even mid- and small-caps have run up. Watch out for valuation risk.