Indian tech majors to see uptick from next fiscal with added benefits from GenAI

• The Indian IT sector will see muted demand in FY24 but will pick up from FY25 onwards, says Goldman Sachs.
• Deal wins are at all-time highs, and will convert into revenues albeit with a lag.
• GenerativeAI could add 50-100 basis points of incremental revenue growth to India IT from FY25.

The Indian IT sector is set for a slow year as global slowdown has made companies rethink their tech spends. However, it’s not all gloom and doom ahead for the sector as a recent report by Goldman Sachs expects things to start getting better from the next financial year (FY25).

“We forecast a 9-10% annual revenue growth for our India IT coverage from FY25, which is a 2x multiplier of the 5% revenue growth for GS covered global companies in CY24,” the report reads adding that the market could be underappreciating the recovery and upside from the next financial year.

Deals wins = revenues + lag

As per historical data, after periods of economic slowdown, IT services companies gained due to higher outsourcing as well as pent-up demand. Moreover, the fears of a possible recession in the US are waning, and even as major companies are delaying decision making due to uncertainties — Indian companies have won record deals and that will translate into revenues – even with a lag.

“Deal wins for IT services companies have remained robust and close to all-time highs, and as the macro environment improves, we expect to see conversion of these deals into revenues,” Goldman Sachs says.

The valuations of IT companies have seen a correction, yet they’re at a premium compared to their last ten-year average. However, these valuations are justified as per GS. “We believe the market now views tech spends as a lot more resilient, and less susceptible to disruptions, as proven through various cycles.”

Moreover, payout ratio, as defined by total shareholder payout upon net income, has significantly improved for India IT over the last ten years, from 30-40% earlier, to 90-100% now.

Source: Goldman Sachs

GenAI advantage to add to revenue growth

Almost all Indian tech majors including TCS, Wipro and Infosys announced large-scale investments in generative AI and a few even said that they have such projects in the pipeline. That’s not only taken off the fear that increased automation could negatively affect Indian tech majors, but might have potential upside.

As per GS, Generative AI could add 50-100 basis points of incremental revenue growth to India IT from FY25. However, early margin benefits will largely be passed on to the clients due to competition.

Also generative AI is layered on top of existing cloud architecture, and IT companies will play an important role in integrating the technology with existing cloud applications.

“While we expect all companies in our coverage to see tailwinds from adoption of generative AI, we expect companies having a wider geographical footprint and deeper vertical expertise as larger beneficiaries; we see TCS and Infosys as bigger beneficiaries, given their scale benefits,” the research firm said.

Indian IT companies have lived through many cycles of tech disruption and navigated them successfully by building products and services to cater to such shifts and genAI will be no different becoming one more stepping stone, analysts believe.

“A new computing era has begun.” said Jensen Huang, founder and CEO of Nvidia after it reported the highest-ever revenue for the 2nd quarter ended July 30, 2023. With Data science and Artificial Intelligence shift happening in the IT Companies, this may start a new leg of upside in Indian IT Companies. Indian Companies that might benefit from the AI shift happening globally👇 🔸Zensar Technologies (₹ 516) $ZENSARTECH.NSE 🔸Kellton Tech Solutions (₹81.6) $KELLTONTEC.NSE 🔸OFSS (₹4016) $OFSS.NSE 🔸Tata Elxsi (₹7272) $TATAELXSI.NSE 🔸Persistent Systems (₹5121) $PERSISTENT.NSE 🔸Saksoft (₹335) $SAKSOFT.NSE 🔸Birla Soft (₹475) $BSOFT.NSE

— (@CA_RaghavWadhwa) August 24, 2023