Jump to content

India’s IT sector is staring at a bleak winter


andhra_jp

Recommended Posts

I see multiple risks for India’s large-cap information technology (IT) companies as we go into a historically seasonally-weak third quarter. The US presidential election adds to this year’s headwinds, as does geo-political uncertainty, sharp volatility in US bond and local equity markets, and unequal growth in banking, financial services and insurance (BFSI), the largest sector for most Indian IT service providers. 

Bloomberg’s consensus earnings per share (EPS) estimates for top Indian IT companies were cut by 1% after their second-quarter 2024-25 earning announcements.

Though most players showed broad-based growth, their bleak commentary around a revival in discretionary demand remained unchanged from the preceding few quarters. Broader discretionary demand remains muted, and each player only sees growth in a few pockets. 

According to research and deal-negotiation firm ISG, BFSI order activity is down 11% year-to-date in managed services, meaning some of the recent sequential recovery seen by Indian IT firms could be due to a delayed conversion to revenues of deals won during the first half of this calendar year. 

In addition, a lack of mega-deals (above $1 billion) announced by large-cap Indian IT players over the past 12 months implies muted sequential growth for the next few quarters. (Separately, this means ISG’s own core business of mega-deal contract negotiation is under pressure.)

In response to disappointing revenue growth, Indian IT giants have scaled back hiring in 2024. Unlike previous years, when the addition of thousands of recruits pointed to expansion, the approach now leans towards conserving resources. 

For mid-sized and small players, the hiring freeze isn’t merely a budgetary decision; it’s a bid to stay competitive. Leaning on digitalization and increased productivity of existing resources, these companies are looking to protect (if not expand) margins while they await an uptick in demand. 

The unintended side-effect is a cultural shift within organizations: new talent, once a source of fresh energy, is now conspicuously absent, and current employees must shoulder the weight of increased expectations.

The phrase ‘Generative AI’ generates buzz across boardrooms, but its promise remains elusive. For the Indian IT sector, this technology’s role is ambiguous, if not puzzling. On one hand, there’s tremendous optimism about AI’s disruptive potential. 

On the other, enterprise customers’ lack of defined use cases has put tech providers in limbo. Few companies are willing to bet big on Generative AI without clarity, and enterprise clients—many of whom are barely scratching the surface of AI beyond basic automation—are struggling to identify where it would add value to their existing IT infrastructure.

Some clients are cautiously optimistic, dipping their toes into the technology with pilot programmes in content creation, customer support and process automation. However, Generative AI’s full integration into enterprise IT systems is far from a done deal. 

For Indian IT, which thrives on proven scalable solutions that translate into large deals, which have been slowing, the nascent stage of Generative AI adoption doesn’t yet align with the industry’s traditional growth model. 

The industry needs solid use cases, with the budget commitment that will demand long-term IT support, development and consulting—services that remain under-used until a clearer picture emerges. 

This leaves IT providers in an uncomfortable position—they must be ready to respond to rapid AI demand growth without a clear sense of scale or timing.

While the buzz is aspirational, Indian IT companies are focusing on improving margins for now. Apart from hiring freezes, they’re investing in automation within their own operations, streamlining processes and trimming service redundancies to squeeze out more profit from stagnant revenues. 

Some are accelerating the adoption of internal AI tools, not as client-facing innovations, but as cost-saving measures—automated coding, resource allocation, etc.

However, this relentless focus on operational efficiency is a double-edged sword. While it provides immediate relief for margins, it risks slowing the pace of innovation. 

As IT firms pivot to this efficiency-first model, they might miss out on the next wave of growth, whether that comes from Generative AI or another breakthrough technology. A journalist told me that Indian IT has become a “traditional" sector (read one with slow growth), much like the steel industry!

As we close 2024, these companies are in a holding pattern. The final quarter of 2024 may not yield ground-breaking revenue surges but is shaping up to be a pivotal period for positioning in 2025. If Generative AI finds its footing with enterprise clients, Indian IT providers may be poised for a phase of substantial growth. 

If not, they’ll still have their foundations in digital transformation and operational efficiency to fall back on. This cautious yet steady approach may not yield the explosive growth of the past. 

But it allows Indian IT to adapt to an era defined by rapid technological shifts and uncertain demands. With 2025 around the corner, the stage is set for a reckoning between incremental growth and the potential of technological transformation, where agility and patience may define the winners.

Meanwhile, the Nifty IT index is trading at a significant premium over the Nifty, despite its lower earnings growth potential. Choose your bets wisely.

Link to comment
Share on other sites

25 minutes ago, tables said:

not just NIFTY IT, entire NSE is overvalued.

markets will remain almost at same levels until 2027.

thats common kada..circtuit breaks happen every 7-9 years..last one recently happened in 2022-2024..NSE almost doubled up..before that it happened in 2014..next one might be around 2030-2032

Link to comment
Share on other sites

Join the conversation

You can post now and register later. If you have an account, sign in now to post with your account.

Guest
Reply to this topic...

×   Pasted as rich text.   Paste as plain text instead

  Only 75 emoji are allowed.

×   Your link has been automatically embedded.   Display as a link instead

×   Your previous content has been restored.   Clear editor

×   You cannot paste images directly. Upload or insert images from URL.

×
×
  • Create New...