Shares of Infosys, TCS, Wipro, Tech Mahindra, HCLTech and other Indian IT companies are likely to remain in focus on Monday after Accenture forecast full-year revenue growth above Street expectations, easing some concerns over weakness in demand across the global technology services sector.
Last week, Infosys ADRs gained about 8%, while Wipro ADRs rose 3%, tracking the positive reaction to Accenture's results and guidance.
The consulting major said it expects annual revenue growth of 3-6%, ahead of analyst estimates. The Dublin-based company reported fourth-quarter revenue of $18.68 billion, compared with analysts' estimate of $18.03 billion. Its outlook pointed to steady demand across consulting and managed services, while AI-related work also supported sentiment at a time when investors were concerned about slower discretionary technology spending.
What does it mean for Indian IT?
Accenture's commentary is closely watched as an indicator of global demand for technology services. A stronger-than-expected outlook from the company could improve sentiment towards Indian IT exporters such as Infosys, Wipro, TCS, HCLTech and Tech Mahindra, which have significant exposure to clients in the US and Europe.
Indian IT stocks have faced a difficult year as clients delayed discretionary spending and investors remained concerned that artificial intelligence could reduce demand for traditional software services work. Technology companies are also expected to report a weak September quarter, with brokerages anticipating pressure from AI-led pricing changes and cautious client spending. The sector's top Indian IT companies could see one of their weakest quarterly performances in three years.
The Accenture outlook offers some hope for Indian IT, which remains the Nifty's third-largest sector by weighting after financials and energy. It also comes as investors assess whether concerns around the $315-billion industry have been overstated.
"Accenture's results, commentary and guidance are slightly positive for Indian IT. Guidance of recovery in the consulting business alludes to early signs of possible recovery in discretionary spends, though not in the immediate future," Nuvama said in a report. "We... maintain that Gen AI will eventually lead to expansion of TAM for Indian IT companies."
Nuvama said that re-establishing relevance in the AI era, with billions of dollars of idle cash on balance sheets, should not be beyond the reach of leading companies in a sector where India remains the unchallenged global leader.
What to expect from Q2 results?
Large IT companies could post their weakest Q2 growth in three years, according to Jefferies, while aggregate sector growth is expected to increasingly come from acquisitions rather than organic expansion.
Jefferies expects aggregate revenue growth of 1.7% sequentially in constant currency terms, while organic growth is expected at just 0.8%. Large IT companies are expected to grow 0.5%, compared with 3.5% for mid-sized companies.
"The IT services pie is still growing, but the AI-adjusted pricing pool available to vendors is shrinking," Kotak Institutional Equities said.
The brokerage said clients are building productivity concessions into contract renewals and retaining a larger share of savings generated by AI. As a result, deal wins are increasingly helping vendors maintain their relevance rather than ensuring growth.
The focus of the AI debate in Indian IT has also shifted from whether the technology will disrupt jobs to how quickly it could reduce the value of existing services. Kotak expects gross deflation of about 7% and net deflation of 3.5% for companies as clients push for efficiency gains and lower pricing. While AI-led revenue opportunities are increasing, they remain insufficient to offset deflation in the existing business, it said.
Commercial arrangements are also being reset. Emkay Research said clients are increasingly factoring AI-led efficiency gains into renewals, vendor consolidation programmes and cost takeout deals.
Disclaimer: This article has been written by Veer Sharma, who is not a SEBI-registered Research Analyst or an Investment Adviser. Veer Sharma and his ‘relative(s)’ (as defined under Section 2(77) of the Companies Act, 2013) do not hold any financial interest in the companies mentioned in this article as of the date of publication. The views/recommendations mentioned in this article, wherever applicable, are those of the respective SEBI-registered Research Analyst/brokerage and have been reproduced/reported with due attribution. They should not be construed as the views or recommendations of The Economic Times Digital or the journalist. Readers are advised to consider the original research report and make their investment decisions based on their own assessment. Brokerage disclaimers here.
