Infosys losing a $1.5 billion AI deal from a global firm last week, and muted revenue growth guidance by Accenture, are clear indicators that domestic IT firms are from a recovery path, at least till the first of 2024 calendar year. Any chances of revival can only be expected by October, according to analysts.
True, the emerging area of generative AI shows some potential, but analysts say that deals in this segment will not be big enough to make up for the slowdown in the core domains like BFSI which make up for the bulk of the revenue. They have a point as most of the Gen AI works are now at pilot and proof of concept stage and will take time to scale up.
In a separate note, the brokerage firm observed that the recent earnings and outlook commentary by Accenture reaffirmed their expectations of cautious near-term demand. While rate cuts can reduce macro uncertainty and spark spending in the future, haze around the near term continues, it stated.
“Significant recovery in discretionary spending, at least in 1HCY24, appears a low probability event. We expect 8-9% industry growth in FY2025E,” Kotak said.
According to UnearthInsight, tech spend recovery cycle will start post June or July 2024 “as rate cuts should help ease inflation drawing consumer confidence/spend and eventually allowing companies/businesses to invest in tech not just for optimising costs but also helping improve margins and also invest in transformation tech for experience, ease, efficiency through Cloud, Gen AI and Digital tech plus”.
UnearthInsight sticks to 5% – 6% revenue growth for FY24 and 6% – 7% estimated revenue growth potential for FY25 due to continued lower visibility on consumer spend recovery leading to lower tech spend.
Motilal Oswal in a note hinted that the ongoing weakness in discretionary spend that it saw in Accenture would be echoed by Indian peers as well. It said continued weakness in CMT (Communications, Media and Technology) is an ongoing overhang on Tech Mahindra.
Emkay Global expects FY25 estimates of high single-digit revenue growth in Tier-1 companies, which builds some improvement in discretionary spending. Peter Bendor-Samuel, CEO, Everest group, said, “Given the current customer sentiment we see very little chance of a significant improvement in the first quarter and likely that this will spill over into the second quarter”.
According to Morgan Stanley the negatives from Accenture’s weak commentary and growth guidance more than offsets the positives for Indian IT stocks in the near term.
“Share prices of IT stocks have surged over the past week, with more of a macro trade playing out, ignoring near-term fundamentals. We see limited scope for revenue upgrades for India IT peers in the near term given a challenging macro environment on discretionary spending continuing as highlighted in Accenture management’s commentary,” the brokerage said.
On Saturday, Infosys announced that an undisclosed global company, which had previously signed a $1.5 billion deal focused on artificial intelligence solutions, has now decided to terminate the memorandum of understanding with it. The deal was intended to be of 15-year tenure, inked in September. The development signalled the increasing uncertainty in the demand and technology budgets of IT service customers.