 "IT sector")
Analysts remain divided on the road ahead for the Indian information technology (IT) companies over the next few years, even as US-based Nvidia Corp, a leader in artificial intelligence (AI) surprised the street with its latest quarterly earnings and an upbeat guidance for the October quarter.
Nivdia's recently quarterly results showed revenue doubled to $13.5 billion, while profit came in at $2.70 a share. Analysts had forecasted sales of nearly $11 billion and profit of $2.07. For the October quarter, it expects sales to hit around $16 billion, as compared to analysts' expectations of $12.5 billion, reports suggest.
Closer home, over the next few years, analysts at Goldman Sachs expect growth in the IT sector to be fueled by the pent-up demand (order book has remained robust), initial tailwinds from Generative AI and continued shift to cloud and managed services. They see a 9-10 per cent annual revenue growth (in the companies they track) from FY25 onwards. LTIMindtree (LTIM), Infosys, and TCS are their top picks in the sector with a 'buy' rating. Tech Mahindra (TechM) and Wipro are their 'sell' calls.
Indian IT Services companies, they said in a recent note, have doubled their market share in the last 10 years to 6.2 per cent of the global IT spending in CY22, and given the structural advantages of a large, skilled and low-cost workforce, coupled with a diversified geographical footprint, they expect Indian IT firms to continue gaining share in the years ahead.
"Operating profit growth at 12-15 per cent over FY25-26 is likely to be faster than revenue growth, as we see presence of multiple margin levers and forecast an expansion in margins for companies within our coverage. While India IT is trading at premium valuations versus its last 10-year average, higher multiples are warranted as growth in IT/Tech spends as an industry perennial with a lower susceptibility to disruptions, and shareholder payouts having meaningfully improved over the decade," wrote Manish Adukia, Harshita Wadher and Mansi Mittal of Goldman Sachs their note.
At the bourses, meanwhile, the Nifty IT index has underperformed with a gain of around 8 per cent thus far in fiscal 2024 (FY24), as compared to nearly 12 per cent in the Nifty50 during this period.
High costs
Though business-wise things may be looking up for the sector over the long-term, analysts at Jefferies caution that the companies will continue to grapple with high employee costs. This, they believe, will keep margins under check.
Employee pyramids of Indian IT services firms (share of employees below 30 years), according to Jefferies, have deteriorated meaningfully in FY23, after strong improvement in FY22. Notably, the percentage of employees below 30 years for TCS, TechM and LTIM has fallen even below FY21 levels, more than offsetting the improvement seen in FY22.
IT firms' ability to manage their pyramid, the research and brokerage house feels, depends largely on their scale, the demand environment and its nature and onshore-offshore mix. TCS, HCL Tech and Coforge are its 'hold' calls; sees Wipro, Tech Mahindra, LTIMindtree underperform the markets. Infosys is Jefferies' only 'buy' recommendation.
"Employee/delivery costs are unlikely to support margins in FY24/25 even as IT firms look to shore up utilisation, due to lack of pyramid optimisation given uncertain demand environment and elevated mid-level attrition driving cost pressures. Aggregate employee related costs (employee + subcontracting) are likely to remain elevated at 67 per cent of sales and will limit margin expansion,” wrote Akshat Agarwal and Ankur Pant of Jefferies in a recent note.
Points of view
- IT companies’ ability to manage their pyramid depends on scale and onshore-offshore mix
- Indian IT services firms have doubled their market share in the last 10 years to 6.2 % of the global IT spending in CY22
- The Nifty IT has underperformed the Nifty50 with a gain of around 8% thus far in FY24, the latter has gained 12%
