IT Sector Gains Momentum As BFSI Vertical Boosts Discretionary Spending

The Indian IT sector is seeing discretionary spending in the banking, financial services, and insurance vertical increasing, hinting at hopes of demand revival for the industry. IT majors expect a better outlook for the second half of the fiscal, while they remain cautious, as other demand in verticals hasn't picked up significantly yet. 

The BFSI vertical—a major revenue contributor for IT companies—had pulled back on discretionary spends, amid uncertain macroeconomic conditions. Uncertainty over US Fed policy and upcoming elections led to BFSI clients delaying budgets, resulting in a year-on-year decline in BFSI growth since fiscal 2023 for many Indian IT companies. 

Discretionary spending is being directed towards renewing older projects, newer generative AI initiatives, or projects aimed at building solutions to address regulatory requirements. The focus even for discretionary projects stays on driving cost-efficiency and automation, with a need for high return on investments, say industry analysts. 

“The recent US Fed interest rate cut has had a major positive impact," said Sumit Pokharna, VP analyst, Kotak Securities, adding that greenshoots are now visible, with discretionary spending getting incrementally better.

BFSI clients intend to spend, but stay focused on cost efficiency and automation. The funding is going for projects that give high return on investments, Pokharna said.

IT major Infosys Ltd., in its recent second quarter earnings call, pointed out that the financial services sector in the US continues to see discretionary spending increase in capital markets, mortgages, cards, and payments.

Similarly, with the spending getting revived, Wipro Ltd. is seeing growth through its biggest acquisition, Capco—the consultancy arm for financial services and energy industries. 

Wipro's Chief Executive Officer Srini Pallia said at the earnings call, “If Capco is growing for us, that means there is a discretionary spend because their dependence is completely on discretionary spend."

“For the last couple of years, largely after the Covid boom, it was a matter of survival; hence, only essential cost-saving technology and services were being outsourced," said Gaurav Parab, principal research analyst at NelsonHall. "Now, as the economy recovers, banks have started doing well and started thinking about the projects put on the back burner.” 

Discretionary spend is going towards newer projects in the generative AI space, renewing previous projects, or building to address regulatory requirements, he said.

Indian IT Out Of The Woods? 

While discretionary spending in the BFSI vertical is picking up, demand outlooks for other verticals are still subdued. Further, any changes caused by geopolitical tensions, too, could put recovery on the back track, say analysts.

Infosys, for instance, noted that certain verticals remain muted.

“In automotive, we see slowness in Europe. In other verticals, the view and the discussions are similar, so we don't see any change. There is no new discretionary in retail or hightech; more focus is on cost takeout itself,” Parekh said. 

Parab notes that with BFSI starting to do well, all adjacent industries, such as healthcare and manufacturing, also pick up. Although this is the start of a recovery, two more quarters are required for discretionary spending to bounce back. 

Similarly, Pokharna notes that revival for the industry will come by the next fiscal. No significant changes would be seen in the rest of the fiscal, as generally the second half of the year is not the strongest for Indian IT companies. He also cautioned that a complete demand revival is still to be watched out for, as changes in geopolitical situation could become a headwind. 

“While we see the optimism that's coming out of the improving demand environment across multiple verticals, we are also a little bit more cognisant of the broader macroeconomic environment and the geopolitical context,” Chief Executive Officer of HCLTech Ltd. C Vijayakumar said.