Yet, save for Wipro Ltd, the shares of the remaining four IT services firms—Tata Consultancy Services Ltd, Infosys Ltd, HCL Technologies Ltd, and Tech Mahindra Ltd—have delivered better returns than both the Sensex and the Nifty 50 so far this year. In 2023, TCS and Infosys stocks fared worse than the Sensex, while the other three outperformed.
The Nifty IT index has also vastly outperformed the two benchmark indices, gaining 22.48% in the year through 27 December. The Sensex has gained 8.89% so far this year, and the Nifty 50, 9.53%.
Analysts say investors are loading up on Indian IT stocks in anticipation of a recovery in tech spending by Fortune 500 companies as the US Federal Reserve is set to cut its key interest rates further. The Fed has lowered its interest rates by a percentage point this year but indicated earlier this month that it may opt for fewer rate cuts next year as it battles stubborn inflation.
“… As interest rates ease, discretionary spends can pick up, translating to more business for IT service providers,” Pramod Gubbi, founder of Marcellus Investment Managers. “When the US Fed indicated (in September) that it was done with rate hikes from March 2023, the market had started to factor in growth.”
Also read | Could a weak order book act as a speed bump to Indian IT’s growth?
TCS, Infosys, HCLTech and Wipro saw their order books, or total contract value, decline in the first half of 2024-25 (April-September) compared to the corresponding year-earlier period, marked by the absence of ‘mega deals’ that are worth more than $1 billion.
The second half of the fiscal year (October-March) is historically weaker for Indian IT services companies because of fewer billing days and more holidays. Even so, these companies have issued positive revenue guidance for FY25 and have been hiring more people.
“This year, as growth is looking promising, the IT sector is outperforming out of expectation that things will get better, and hence the returns,” said Sanjeev Hota, vice-president, head of research at Mirae Asset Sharekhan.
The spectre of GenAI
Keith Bachman, an analyst with BMO Capital Markets, said in a 12 December report that increased hiring by India’s largest IT services firms in recent quarters was a leading indicator signalling better growth, which in turn could drive a rally in their stocks.
Mint reported last week that a renewed hiring spree by Dublin-headquartered and NYSE-listed Accenture Plc painted a sanguine outlook for India’s IT services companies as it signalled a rebound in global IT spending.
Yet, analysts are cautiously optimistic about the prospects of Indian IT services firms next year considering the rise of generative artificial intelligence, or GenAI, which could dash the sanguine outlook.
“GenAI is deflationary in my view as it will mean that IT services will be delivered by fewer people, and therefore, the revenue can come down,” said Gubbi, adding that the money saved by customers will go to more GenAI investments and new streams of work will come from GenAI.
Also read | Lessons for Indian IT services firms as Accenture, IBM lead GenAI charge
While AI and GenAI currently account for only a fraction of IT services companies’ revenues, these technologies are biting into their clients’ discretionary IT spending.
“… We question if 2025 IT services market growth will benefit from net new demand, including new generative AI projects, more so than current pricing pressure and generative AI deflationary forces,” said Bachman of BMO Capital Markets.
“A plausible scenario could be that in 2025, IT services growth might improve over 2024 (with upside tension to consensus estimates in this scenario), and then as the capabilities of generative AI grow and improve, the deflationary impact is more pronounced in 2026 and beyond, leading to prolonged growth headwinds.”
Also read | Why IT services firms don’t offer full-year guidance but set lofty revenue goals
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