Why Nomura Remains Cautious On Indian IT Stocks Despite Recent Run Up

Japanese brokerage Nomura remains cautious on the Indian information technology sector outlook, even as the NSE Nifty IT index has managed to outperform peers so far this year. This is mainly because it expects the sector to remain subdued in the wake of looming uncertainty due to U.S. President Donald Trump's stringent visa norms, and increased competition from multinational companies and new players.

Also Read: IT Index Posts Best Start To Year Since 2015

Stringent Visa Rules

Margin pressure from exhaustion of traditional levers, pricing pressure in legacy and need to pre-emptively change onsite staffing in light of immigration tightening remain, Nomura said in a note. As per the latest norms issued by the Trump administration, the U.S. Citizenship and Immigration Services can issue H-1B visas to an employee at a third-party worksite only for the period for which he/she has work.

The NSE Nifty IT index is the only sectoral index to post gains so far this year. The index has risen more than nine percent year-to-date till March 14, posting its best start to a year since 2015.

Also Read: TCS Sees Opportunity As E-Commerce Industry Shifts Focus To Customer Experience

Higher Competition From MNCs

“Increased competition from multi-national companies, including Accenture, Deloitte and Capgemini, coupled with new challengers, including EPAM Systems, Luxoft Holding and Virtusa Corporation, Tier 2 companies and in-sourcing hurts growth for Tier 1 information technology companies,” the Nomura note added.

Nomura advised to reduce exposure to Infosys Ltd., Wipro Ltd. and Tata Consultancy Services Ltd., while recommending a Hold on HCL Technologies Ltd.

Rate increases. coupled with surplus funding from tax reforms are likely to increase digital spending, aiding companies such as Infosys, Nomura said in the note after meeting the company's management. “Clients may ask for efficiency or deal flow through cost takeouts after tariff increases on steel and aluminium,” Nomura said.

Also Read: Trump Administration Cracks Down On H-1B Visa

The visa tightening norms are unlikely to impact Wipro in a significant manner as the company is looking to reduce dependency on visas by hiring more local people. "The company expects next financial year to be better than the current one largely driven by sorting some of the company specific issues," Nomura said.